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ELEMENTS OF ECONOMICS 

FOR 

HIGH SCHOOLS 






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PARKER, A. M. 



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COPYRIGHT, 1916 

by 

U. S. PARKKR, A. M. 



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MAR 28 1916 



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CHAPTER I. OUTLINES OF ECONOMIC HISTORY. 

Page 

1. Scope of economics 2 

2. Importance of study of economics 6 

3. Industrial evolution of society 6 

4. The first two stages 9 

5. The agricultural stage 9 

6. The handicraft stage 10 

7. The factory stage 12 

8. Industrial development in U. S. to 1815 13 

9. Development from 1815 to 1861 14 

10. Development since 1861 16 

CHAPTER II. LAWS OF CONSUMPTION. 

11. Definitions 20 

12. The law of satiety 22 

13. The law of variation of utility 23 

14. Marginal and total utility 23 

15. The law of demand 25 

16. The law of elasticity of demand 26 

17. The law of economic order of consumption 28 

18. Law of development of wants 30 

19. Engel's law 32 

CHAPTER III. PROBLEMS OF CONSUMPTION. 

20. The standard of living ■^ 34 

21. The housing problem 35 

22. Evil conditions 37 

23. Causes of these conditions 39 

24. Remedies 40 

25. The liquor problem 43 

2^. Solution of the problem 45 

27. Extravagance of the rich 46 

CHAPTER IV. FACTORS OF PRODUCTION 

28. Production defined 48 

29. The three factors of production 48 

30. Classification of capital 49 

31. Increase of capital 51 

52. Increase of labor: Law of Malthus 53 

33. Our immigration problem 55 

CHAPTER V. EFFICIENCY IN PRODUCTION. 

34. Richness of natural resources 58 

35. Efficiency of capital 59 

36. Efficiency of labor 60 

37. Social cooperation in production 62 

38. Advantages of social cooperation 63 



II 



39. Disadvantages of social cooperation 64 

40. Forms of business organization 66 

41. Corporations 68 

42. Advantages of corporations 70 

43. Evils of corporations 72 

44. Economy of large-scale production 73 

45. Results of this law 75 

46. Relative amount of the three factors: Law of diminishing 

returns 77 

47. Some results of this law 78 

48. Organization of markets 79 

CHAPTER VI. PROBLEMS OF PRODUCTION. 

49. Introduction 82 

50. Forest preservation 82 

51. Floods 84 

52. Waterways 85 

53. Good roads 88 

54. Irrigation 90 

55. Swamp lands 92 

56. Scientific farming 93 

57. Government agencies for studying agriculture 95 

58. Lines of investigation 97 

59. Child labor 100 

60. Industrial education 103 

CHAPTER VIL MONOPOLIES. 

61. Definition of monopoly 105 

62. Classes of monopolies 105 

63. Forms of combination 106 

64. Municipal monopolies 110 

65„ Manufacturing monopolies 112 

66. Evils of monopolies 114 

67. Sherman anti-trust law of 1890 115 

68. Recent anti-trust legislation 117 

69. Monopoly value 118 

CHAPTER VIII, RAILROADS. 

70. Importance of railroads 119 

71. A natural monopoly 120 

72. Railway development to 1850 122 

73. Development of competing systems — 1850-1870 122 

74. Pools, 1870-1887 123 

75. Rate-making 124 

76. Interstate commerce act of 1887 126 

77. Results of the act 128 

78. Recent legislation 128 

79. The present situation 130 

80. Public ownership 132 



III 

CHAPTER IX. VALUE. 

81. Introduction 134 

82. Advantages of exchange 134 

83. Market value and normal value 135 

Si. Competition 136 

85. Demand and supply 137 

86. Cost of production 139 

CHAPTER X. MONEY AND CREDIT. 

87. Functions of money 141 

■88. Characteristics needed in good money 142 

89. Materials needed for money 143 

:90. Credit currency 144 

91. Changes in value of money. Price tables 147 

92. Causes of changes in value of money 148 

93. Effects of credit on prices 151 

94. Law of value of money 152 

95. Changes in prices since 1870 153 

96. Territorial distribution of gold 155 

97. Gresham's law 156 

CHAPTER XL PROBLEMS OF MONEY AND BANKING. 

98. The three problems 158 

99. The standard 159 

100. The commodity standard 160 

101. Bimetallism '. 161 

102. Government paper 163 

103. Functions of banks 164 

104. Needed characteristics of banks 166 

105. Defects in our system previous to 1913 169 

106. The Federal Reserve act of 1913 170 

107. Service 172 

108. Safety 173 

109. Elasticity of credit 174 

CHAPTER XII. INTERNATIONAL TRADE. 

110. The long controversy 177 

111. Advantages of international trade 178 

112. Economic effects of protective tariffs 179 

113. The young industries argument 182 

114. The tariff and wages 183 

115. Other arguments 183 

116. The present tariff 184 

CHAPTER XIII. WAGES. 

117. Distribution 185 

118. Annual income and annual product 185 

119. Money wages and real wages 186 



IV 

120. Demand for labor . 186 

121. The supply of labor 188 

122. The standard of living 190 

123. Productivity 191 

CHAPTER XIV. RENT. 

124. Nature of rent 194 

125. Urban rents 195 

126. Rent not a cause of high prices 196 

127. Rent an unearned income 196 

128. Rent and the increase of population 197 

129. The single tax 198 

CHAPTER XV. INTEREST. 

130. Nature of interest 200 

131. Theories of interest 200 

132. Demand and supply 201 

133. Productivity 202 

134. Long- and short-time loans 204 

135. The justification of interest •' . . . 205 

CHAPTER XVI. PROFITS. 

136. Nature of profits 207 

137. A residual share 207 

138. No uniform rate 208 

139. Profits and interest 209 

140. Profits and v/ages 210 

141. Distribution and social progress 211 

CHAPTER XVII. LABOR PROBLEMS. 

142. Origin of labor problems 213 

143. Forms of labor organizations 215 

144. Objects of trade unions 217 

145. Means of securing demands — Monopoly 217 

146. Joint agreements 218 

147. The closed shop 219 

148. Strikes 220 

149. Limitation of output . 221 

150. Compulsory arbitration 223 

151. Profit-sharing 224 

152. Cooperation 225 

153. Labor legislation 226 

CHAPTER XVII. SOCIALISM. 

154. Socialism defined 229 

155. Origin and growth 229 

156. Charges against capitalism 230 

157. Criticisms 231 

158. Socialist production 232 

159. Socialist distribution 234 



ELEMENTS OF ECONOMICS 

CHAPTER I. 
Outlines of Economic History. 



1. SCOPE OF ECONOMICS. Economics, or Political Economy, 
is the science which treats of men's efforts to get a living. It is one 
of a new group of sciences called the social sciences. Man had 
not yet emerged from barbarism when he began to make a more or 
less systematic study of the facts and forces of nature, and the crude 
elements of some of the sciences of nature and of mathematics began 
to develop. The facts and forces involved are so vast and their secret 
workings lie so deeply buried that the natural sciences are not yet 
complete; but considerable progress along these lines had been made 
before man began a systematic study of his own social activities. The 
Greek philosopher, Aristotle, made a careful study of the governments 
of his time, and his book on politics contains many sensible con- 
clusions on the general principles of government. But his work was 
fragmentary, and very little more was done towards working out the 
science of government during the next twenty-two centuries. Not 
until the nineteenth century did any systematic work on government 
appear worthy of the name of a scientific book. And the science of 
economics is equally new. The first great work upon the subject. 
Adam Smith's Wealth of Nations, appeared in 1776. But it was quite 
crude, and not till well into the nineteenth century did the subject 
begin to assume a real scientific shape. 

During the last half century great thinkers have turned their 
attention to man's social activities, and several social sciences have 
been roughly worked out. There are six great social institutions 
around which man's activities center, the home, the church, the 
school, the club, the state, and business. Each of these is an institu- 
tion, since it is organized, each having its own peculiar organization. 
In the home are the father, the mother and the children, each having 
their duties to perform and all working towards the common happiness 



ELEMENTS OF ECONOMICS 



and development of all. The church is likewise organized, and has 
its special function to perform. Each of these institutions, its organ- 
ization, its functions, and the principles that should guide men in 
their associated efforts in each of the institutions, would constitute- 
a social science. History is sometimes classed as a social science, 
but it may be doubted that history can be called a science . There are 
indeed many great principles which history teaches, but they would 
be included in some one or more of the definite social sciences. His- 
tory is rather the tracing of man's activities along all lines of effort,, 
including the six named above, together with the growth of language,.. 
literature and art, and man's mastery over the secrets of nature. The 
range of subjects is too vast and our knowledge of the field as a whole 
too limited to enable us to treat history as a science, which is a body 
of laws. But it is a social study. Men are attempting to study man's 
general social activities as a whole and reduce them to a scientific 
treatment, and the name of this newest of the social sciences is So- 
ciology. But as yet the vastness and indefiniteness of the subject has 
prevented the formulation of any very definite science of man's social 
activities in general. 

Of the six institutions named above, the two that are now studied 
most, both in school and out of it, are the state and business. In the 
study of the state, which is man's political organization for the pur- 
pose of government, the school is usually included, since the schools- 
are under public management and the political organization controls 
the schools in a general way. The study of business from the broad 
viewpoint of social activity, is the study of economics. At first sight 
the two subjects, civics, or the study of government, and the study of 
economics may seem entirely distinct and separate. But as a matter 
of fact the two run together at several points, and our school texts on 
the two subjects overlap considerably. This causes unnecessary du- 
plication and should be avoided if possible . The study of the structure 
and workings of government are sufficiently distinct from man's activ- 
ity in gaining a living, so that no trouble arises under those two groups 



ELEMENTS OF ECONOMICS 



of topics. But as soon as we begin to consider what the government 
is doing to benefit the people in their efforts to gain a living we are 
led over into the field of economics. Such subjects as govern- 
ment control of monopolies and of railroads, minimum wage boards, 
and numerous other topics often treated in our text-books on civics, 
are parts of political economy, and cannot be understood until the prin- 
ciples of that science are understood, and should, therefore, be treated 
in economics rather than in civics. In the selection of topics from 
this border land of uncertainty, the author has been guided by the 
following principle: If the activity of the government along any line 
affects vitally man's efforts to gain a living, and a knowledge of the 
subject involves the principles of economics, the topic is included in 
the science of economics. 

As society is at present organized in its efforts to gain a living, 
the principles of the science naturally fall into four groups, known as 
Consumption, Production, Exchange, and Distribution. Man craves 
certain things which satisfy his economic wants, and his action, 
prompted by this longing, can be reduced to certain laws, known as 
laws of consumption. To satisfy these wants, goods are produced, 
and the success of our efforts in this direction depends upon certain 
conditions, which may be reduced to laws of production. And since 
each man produces by himself only a few things that he wants, or 
maybe none at all, he must sell what he produces and buy what he 
wants; and this involves the laws of Exchange, or of Value. And 
since some of the people in our industrial society own the land, some 
own capital, and some own neither, and are therefore compelled to 
work for others for a living, a fourth group of topics arises called Dis- 
tribution, which treats of the laws of wages, of interest, of rent and 
of profits. That is, society is now divided into four industrial classes, 
which overlap somewhat, land owners, owners of capital who do not 
themselves use it but loan it at interest, wage earners, and the busi- 
ness manager who organizes the land, labor and capital. and sets them 
to work. 



ELEMENTS OF ECONOMICS 



2. IMPORTANCE OF THE STUDY OF ECONOMICS. From- 
the nature of economics it is apparent that the importance of study- 
ing it can hardly be overestimated. The securing of wealth is nec- 
essary to enable men to pursue successfully their vocation, to enable 
them to perform with satisfaction their activities in the higher walks. 
of life. To secure wealth most readily, the principles of production 
must be followed; and to ensure that all classes participate in the ma- 
terial prosperity of the nation and thus have a chance to enjoy the 
higher things of life, there must prevail just principles of distribu- 
tion. But this ideal condition does not prevail. There is much dis- 
content in the world growing out of what many believe to be unjust 
conditions, and we have a vast number of problems demanding solu- 
tion. Such problems as the control of monopolies, the settling of 
labor troubles, securing a living wage for the lower classes of labor- 
ers, improving the so-called "homes" of our "slum" districts, these 
and many other problems loom up before us and demand solution,, 
and if they are not solved, and solved justly, our Republic is doomed. 
And who are going to solve these problems? The people. And 
if the people do not understand these economic problems, how can 
they solve them intelligently? Every citizenN)f the land should un- 
derstand the essentials of economics, if he or she would not be a mere 
cipher in the great social work of lending a helping hand, and lending 
it intelligently. Our government must take hold of many of these 
problems, and in a republic the people must control the governments, 
and decide how these problems shall be solved. 

3. THE INDUSTRIAL EVOLUTION OF SOCIETY. The pres- 
ent organization of industrial society will be better understood if we 
approach it from the historical point of view and trace briefly the 
great changes that have come about since those primitive days when 
men were savages. In this chapter, therefore, we shall give a brief 
sketch of man's industrial development in general and of the special 
development of the United States. 

Man is a reasoning being and he therefore tries to increase his 



ELEMENTS OF ECONOMICS 



enjojment by improving his surroundings and to lighten his work by 
doing things in better ways. Hence, man alone of all the animal 
creation progresses. In his progress in ways of gaining a living 
we can see five fairly distinct stages. The first was the hunting and 
fishing stage, when men got their living by hunting for roots, herbs 
and animals, and by catching fish from the streams and lakes. The 
second was the pastoral stage, when man had domesticated some of 
the animals, and roamed around with them in search of food for them. 
The next was the agricultural stage in which men learned to culti- 
vate the soil and raise food for themselves and their sheep, cattle 
and other animals. In this age man first had a fixed abode. Then 
in the fourth stage, called the handicraft stage, men began to special- 
ize in their work, and division of occupations resulted. Some con- 
tinued to be farmers, but they no longer made all things they used, 
as in the previous stages; instead, the shoemaker, the carpenter, the 
blacksmith, the cabinet maker, the cloth maker and numerous others 
supplied society with goods other than agricultural products. Fin- 
ally man become more inventive and the age of machinery and the 
great factory was ushered in. 

There were causes for this development in this particular order. 
In each succeeding age man gained greater power over his own hap- 
piness. In the hunting and fishing stage man's living was uncertain. 
When he started out on a hunt he was not sure of finding anything. 
By some means, we know not how, man began to domesticate certain 
animals, and his living was more secure, for less depended on chance 
and more on his own planning. Then when he tilled the ground as 
well as kept his flocks and herds, his living was still more secure, for 
now nature was assisted in her efforts to produce the fruits of the 
earth. But he was as yet jack-of -all-trades and master of none, and 
life was crude at best. Then some with special liking for particular 
lines of work began to specialize, and each man could do better work 
and more of it, because he gained in skill by often repeating the same 
processes. As yet, however, man was trying to cope with nature with 



8 ELEMENTS OF ECONOMICS 

very simple tools run by hand power; then with vast and complicated 
machinery run by steam, water-power or electricity, man greatly in- 
creased his productive powers, and he had more time and means to 
satisfy the longings of his intellectual and spiritual nature. Thus 
each age had its advantages over preceding ages. 

The time of each of these five stages of progress is not definitely 
known, and was not the same in different parts of the world . In parts 
of South America and in Africa the natives are yet in the first stage, 
and some few tribes indeed are in a stage that apparently preceded 
the hunting and fishing stage, when men had not advanced sufficiently 
beyond the brute creatures to be able to kill them for food, but relied 
on roots and herbs. Following the develpoment in the portions of the 
world that first advanced, the time of each stage was roughly as fol- 
lows. The first stretches far back into an unknown past and the time 
of its ending we do not know. When we catch our first glimpses of 
the progressive portions of the world some six or seven thousand 
years ago, in the Valley of the Nile and in the Tigres-Euphrates Val- 
ley, they were well into the agricultural stage, while the Asiatic 
tribes around them were in the pastoral stage, and Europe, except 
bits of Greece, was in the hunting and fishing stage. Roughly 
speaking, the handicraft stage covers the period from the dawn of 
history (about 5000 B. C. in Egypt and Chaldea) till near the close 
of the eighteenth century, or a period of nearly 7000 years. Only a 
small portion of recorded history, therefore, lies outside the fourth 
stage of man's development. After the fall of the Western Roman Em- 
pire in 476 A.D., the western portion of Europe, that is, all west of the 
Greek or Byzantine Empire, was thrust backward for some five or six 
hundred years, the handicrafts declined and man was nearly in the ag- 
ricultural stage, for most people made nearly all the things they used, 
including tools and clothing. The handicrafts did not wholly die out 
in Western Europe, and remained in a crude state, ready to develop 
at the first opportunity, when the barons and knights became less tur- 
bulent and began to respect the rights of commerce to some extent. 



ELEMENTS OF ECONOMICS 



4. THE FIRST TWO STAGES. The first two stages had several 
common characteristics and may be treated together. It was the long, 
dark night before the dawn. Man had no fixed abode and consequent- 
ly progress was exceedingly slow and could not pass beyond the point 
of satisfying physical wants, first, because it took so much time to 
satisfy these wants with the crude means at hand, and, secondly, the 
desire for culture could not be satisfied, even if it could spring up, 
while men were roving around. Schools and books and authors can- 
not exist in that sort of a society. Much progress was indeed made 
during this long period, how long we do not know. A number of tools 
were invented, including the bow and arrow, fish hooks and lines, the 
stone ax, the rude bark canoe; and the art of striking a fire by fric- 
tion had been learned, so that food could be cooked and the rude hut 
or tent warmed. When animals were domesticated a long stride for- 
ward was taken. To make this progress took thousands of years. 
These two stages roughly correspond to the Old Stone Age and the 
first part of the New Stone, or Polished Stone Age. 

Each family was an independent industrial unit, supplying all 
its wants by the products of its own labor, the only division of labor 
being that within the family. For this reason there was practically 
no exchanging of goods, except now and then two individuals might 
barter a little, much as boys now trade pocket knives. But such bar- 
ter would have little more importance to society than the bartering 
of trinkets among the boys today. Class distinctions came in during 
the pastoral stage, enemies captured in battle being enslaved, since 
they could be put to work tending the flocks and herds. But the 
slaves were not numerous and slavery played a small part in in- 
dustry. 

5. THE AGRICULTURAL STAGE. The agricultural stage was 
the dawn before the break of day. With a fixed habitation much pro- 
gress could be made in a shorter time. Now rude huts or temporary 
tents naturally gave place to substantial dwellings, taking on more and 

more of the idea of architectural beauty. Buildings now satisfied 



10 ELEMENTS OF ECONOMICS 

something more than physical wants, and men began to gather 
around them many material things that ministered in some degree to 
the higher tastes. 

As yet the family was in the main independent, though a few 
trades sprang up quite early in the period, and they continued to mul- 
tiply until the agricultural stage passed imperceptably into the handi- 
craft stage. Until well towards the close of the period there was lit- 
tle trade and that was by barter. Now for the first time men gained 
their living by hard and constant toil. Hunting and fishing were not 
very hard work and it was intermittent. Tending flocks and herds 
is hardly work at all. But tilling the soil is work, and the strong 
naturally imposed the burden on the weak, and slavery became a 
prominent institution, and society became divided into two classes, 
landlords and slaves. There were but a few hired laborers and there 
were, therefore, no labor problems to solve. Near the end of the pe- 
riod the Age of Metals began. The first metal used for tools was 
copper. This is a soft metal and was no great improvement over pol- 
ished stone, but it was some better, and would take a finer edge. As 
yet people were crude and ignorant, on the whole, though the elements 
of learning were developing among the leisure classes, and rude be- 
ginnings were made in the development of the art of representing 
ideas by pictures or symbols. 

6. THE HANDICRAFT STAGE. The next great stage, which _ 
covers most of man's recorded history, is called the handicraft stage, 
though a better name would be the Age of Division of Occupations, 
since that is the distinguishing feature of the age. With division of 
occupations men were no longer jacks-of-all-trades, and by concen- 
trating their energies on one occupation became more skillful, and 
forms of material wealth other than lands began to accumulate. Men 
were no longer independent of their fellow men, but were dependent 
on others for most of the things needed. Life was now more complex, 
and social relations became of more importance. Since men must dis- 
pose of their goods, and obtain many kinds of goods in return, ex- 



ELEMENTS OF ECONOMICS 11 

change became an important phase of social relations. Barter would 
no longer suffice and money came into use to facilitate exchanges. 

With division of occupations great changes came about in the in- 
dustrial classes. Between the great landlords on the one side and 
slaves on the other, there grew up a great free industrial class. This 
industrial class consisted of hired laborers, small handicraftsmen and 
merchants. Problems of distribution became important and strikes 
began to trouble the industrial world. During this period, however, 
labor troubles were not serious, since most of the laborers in the 
skilled trades hoped some day to become employers of labor and 
hence they would not be very anxious to build up a strong labor or- 
ganization which would antagonize their interests in later life. 

The development of the trades and of commerce was parallel with 
the growth of cities and of city life. Real culture sprang up and 
great seats of learning flourished. In this period the mind first re- 
ceived special training and great differences in the intellectual power 
of men resulted. In the agricultural stage the great landlords were 
indeed intellectually superior to their slaves; but differences in in- 
tellectual power were small as compared with later times. Great 
minds began to grapple with the mysteries of nature, and the prob- 
lems of life and of science and literature were born. 

This growth of cities and of- a great free industrial class, to- 
gether with other forces, changed labor conditions in the rural dis- 
tricts. Slavery gradually changed into serfdom and the serf in time 
became free. Thus numerous classes took the place of the two great 
classes of the agricultural period. The noble still existed, but beside 
him arose the priests and the men of learning who guarded the re- 
ligious and intellectual interest of the race. The priest and the men 
of learning were often the same, but in some countries they were 
different; that is, a learned class arose who were not of the priest- 
hood. Beneath these two powerful classes, the nobles and the learned, 
including the priesthood, were the merchants, who often rivalled the 
men of the other two classes in wealth and power. Then came the 



12 ELEMENTS OF ECONOMICS 

artisans, who were skilled laborers, and lastly the unskilled laborers 
in cities; in the country small farmers and hired laborers corres- 
ponded roughly to the two lower groups in the city. 

In this age came great changes in tools. The soft copper was 
replaced by the much harder bronze near the beginning of the handi- 
craft stage, or about 4500 B. C, and for three thousand years was 
the chief metal used for making tools and edged instruments. About 
1500 B, C. iron came into use. Many small contrivances were invented 
to increase men's power over nature, such as the spinning wheel and 
the loom, the rude plow, the hoe, the sickle, carpenters' tools, the 
crowbar, and the pulley. 

7. THE FACTORY STAGE. The transition from the handicraft, 
hand-tool using age to the factory stage was so sudden that it has 
been called the Industrial Revolution. It did not at once affect all 
handicrafts, or indeed the majority of them, but it affected a few 
trades which at that time were vastly more important than any 
others, considering the number of people employed. The trades first 
affected were the clothmaking and allied trades. It began in England 
in the last half of the eighteenth century with the invention of Har- 
grave's spinning jenny (1767), Cartwright's power loom (1785) and 
Watt's steam engine (1785). The age of machinery and the factory 
gathered the laborers together in larger groups. During the handi- 
craft stage the business unit was small, something like our familiar 
cobblers' shops of today, with from one to half a dozen workers, in- 
cluding the master craftsman, who worked with his journeymen and 
apprentices and shared with them the hardships and the pleasures of 
the business. 

But the Industrial Revolution put a great gulf between employer 
and employed, for the day laborer could little hope to become a capi- 
talist employer, because of the great cost of a factory. Thrust from 
the little shop, with its light and its wholesome air and its easy-going 
pace, into the great factory with its foul air and its whir of machin- 
ery, men lost control over their actions and surroundings and became 



ELEMENTS OF ECONOMICS 13 

part of a great machine which set a rapid pace for work. Small 
craftsmen, master-craftsmen and all, sank into the ranks of hired 
laborers, and a few energetic and able leaders became the employing 
class, and from the profits of large capital became immensely 
rich. Here indeed were materials for discontent among the laboring 
classes; thus the Industrial Revolution ushered in the age of indus- 
trial warfare between labor and capital. Social problems multiplied; 
child labor, starvation wages, the "slums," and hosts of others came 
crowding in upon the world. As if these evils were not enough to 
vex society, the business unit grew in size until monopoly in its 
various forms threatens to draw into the hands of a small portion of 
the capitalistic class most of the wealth of the world and leave the 
vast majority of mankind but a very small part of the advantage 
gained from all the labor saving machinery that has been multiply- 
ing since the Industrial Revolution began. 

8. INDUSTRIAL DEVELOPMENT IN U. S. COLONIAL PE- 
RIOD TO 1815. When America was settled, Europe was in the 
handicraft stage, but conditions in the New World caused industry 
to revert to an earlier stage, to a condition similar to that in the 
transitional period between the agricultural stage and the handicraft 
stage. Most of the articles used by the colonists were made by the 
family, the wives making the clothing and the men making the fur- 
niture for the house and the tools for the farm, with the exception 
of a few iron tools requiring great skill, which were imported from 
England or made in the colonies by handicraftsmen. There were 
a few trades, such as carpentering, blacksmithing, shipbuilding, hat- 
making and a fev/ others, but the numbers engaged in them were 
small . The great body of the people were engaged in agriculture, and 
there were no great labor problems. 

The causes of this reversal to an earlier stage of development 
were mainly four. (1) The cost of transportation made it cheaper to 
produce in America all except those things requiring superior work- 
manship, such as edged tools and articles of luxury used by the rich, 



14 ELEMENTS OF ECONOMICS 

including fine clothing and furniture. (2) The intelligence and thrift 
of the housewife enabled her to compete with the clothmaking trades, 
in making the coarser garments, since she could use the same kinds 
of tools as those used by the handicraftsmen; and if she could not 
work quite so rapidly as they it was a by-industry with her. (3) 
Another cause which probably hindered the development of the 
handicrafts to some extent was the British policy of restricting trade 
and industry. But the importance of such restrictions is a matter of 
dispute among historians, some considering it a very important cause 
for the non-development of handicrafts in the colonies, especially of 
those making expensive articles requiring a high degree of skill in 
which there would be no competition with the farmers and their 
wives. Other historians think that British restrictions had little to 
do with it, and thej attribute the meager development of the trades 
to natural conditions in America. (4) The chief condition hindering 
such development was the presence of an / abundance of cheap land. 
Benjamin Franklin, whose judgment is certainly worth considering, 
thought that cheap land was the main thing that prevented the de- 
velopment of the skilled trades. When young men could become 
farmers and their own masters at little trouble and expense, they 
would not care to spend several years learning a trade and then work 
for someone until they could set up for themselves. 

The Revolution did not materially change the conditions of things 
in America. A few industries started up under the stimulus offered 
by some of the states in the way of advertising in Europe for skilled 
workmen to help start the new machinery that the Industrial Revolu- 
tion had produced in England, and by the offer of various rewards for 
setting up factories. But these efforts did not amount to much until 
after the embargo policy and the war of 1812 had afforded special in- 
ducements to capital to go into the manufacturing business. 

9. DEVELOPMENT FROM 1815 TO 1861. The special induce- 
ment which attracted capital into manufacturing was the rise in prices 
caused by the decline in imports, which resulted from the embargo 



ELEMENTS OF ECONOMICS 15 

policy and the war of 1812, At the close of that war imports began 
to flood the country and manufacturers clamored for and obtained 
the protective tariff of 1816. From that time on to the Civil War 
manufacturing constantly increased in relative importance, though 
as yet it was of secondary importance as compared vv^ith agriculture. 

Besides the protective tariff there were several other causes for 
the growth of manufacturing, and these causes would have developed 
manufacturing in time without any tariff, though not so soon. Land 
was no longer cheap in the older portions of the country and a land- 
less population was growing, not all the surplus being attracted 
across the mountains to the Far West of that day. Hence, labor was- 
to be had in increasing abundance, and to become a laborer in the 
factories required no long apprenticeship, as in the old handicraft 
trades. A third cause was the westward expansion of population into 
the regions of the West abundantly supplied with coal and iron and 
other mineral resources needed in the factory stage of development; 
and a fourth cause, which went hand in hand with these other causes, 
was the improvement in transportation, especially the railroad, which 
came in during the last half of the period. All these factors made 
manufacturing as profitable as farming, and capital naturally flowed 
into this new field. 

This meant that the simple life of the colonial days must pass 
away. A large labor class was developing, cities were growing, and 
more push and energy characterized American enterprise, especially 
in the North, where the curse of slavery did not cast its baleful 
shadow over every phase of human activity, physical, mental and 
moral. Trade unions began to be formed; but they were weak and 
ineffective, and though there were strikes occasionally, they did not 
on the whole seriously disturb the industrial world. There was as 
yet free land in the West and the discontented and the adventurous 
were joining the Vv'estward flowing stream of humanity. Thus the 
surplus in the labor market found a vent and did not become seriously 
large; and as a consequence wages were fairly good. At least they 



16 ELEMENTS OF ECONOMICS 

satisfied the less ambitious and adventurous ones who staid at home» 
10. DEVELOPMENTS SINCE 1861. The last half century of 
our industrial history has witnessed four well marked developments, 
(1) the rise of manufacturing to a scale which placed that group 
about on a level with agriculture in importance, (2) the growth of 
monopolies, including railroads, (3) the growth of trade unions, and 
(4) the appearance of the numerous evils connected with the lower 
classes of unskilled workers, such as child labor, sweatshops, over- 
crowding in the great cities, the latter producing a whole crop of 
"slum" problems. 

Among the causes for this great growth of manufacturing five 
were of special importance. (1) The Civil War caused an increase in 
tariff rates and from 1861 to the passage of the Underwood tariff in 
1913 the protective rates were from two to three times as high as in 
the previous period, and this high rate invited capital into new lines 
of enterprise. But the great natural causes were at work. (2) The 
accumulation of capital in the old lines of business would naturally 
cause it to seek new fields; (3) new and rich sources of iron were 
found, especially in the regions around Lake Superior; (4) transporta- 
tion on the Great Lakes cheapened the cost of getting the iron to 
points on the Lakes southward where it could meet the coal from the 
coal fields; and (5) the exhaustion of the supply of our free land, 
which had throughout our history been an outlet both for labor and 
capital as it accumulated in the older sections. 

Monopolies were developing chiefly from two causes. As manag- 
ing ability developed and the size of the business establishment grew, 
certain advantages resulting from large-scale production enabled the 
larger establishments to crush out the smaller; and in some cases the 
maximum unit of efficiency was so large that one kept on growing 
until all rivals were crushed. Then prices rose to suit the notions and 
avarice of the monopolist. In other cases where several big rivals 
arose, none being able to crush out the others, various combinations 
were made whereby competition ceased and prices went up above the 



ELEMENTS OF ECONOMICS 17 

competitive level. 

Conditions were developing favorable to the growth of trade un- 
ions. There was now more than ever a permanent labor class because 
a portion of the labor supply could no longer, after about 1880 at the 
latest, escape to the land. Because of this fact and the incoming tide 
of immigration, wages in many industries declined, especially the 
wages of unskilled labor, and even in the skilled trades wages often 
failed to increase in proportion to the increased cost of living. Here 
were the conditions which from the nature of men would cause unions 
to grow: (1) The existence of a common grievance in the shape of 
low wages, (2) a class consciousness which would develop, and (3) the 
feeling that in union there would be strength to get from the em- 
ployer terms ^hich the individual could not secure. Capitalists were 
combining to create a monopoly against the purchasing public; labor- 
ers were combining to create a monopoly against the employer; and 
competition, upon which men the world over had relied to work out 
industrial justice, after the state withdrew its restrictions upon and 
regulations of business about a hundred years ago, ceased to exist in 
several industries. The gilds of the Middle Ages had hampered busi- 
ness very much by restrictions; and when nations became consolidated 
at the close of the Middle Ages their central governments began to 
take charge of the regulation of industry. After about three or four 
centuries of state regulation of wages, prices and other things, the 
system broke down and freedom of competition was relied on. It 
worked well for about a century, until monopoly arose, and now state 
regulations and state ownership are increasing. 

Out of this complex situation our social ills are growing. The 
exhaustion of the supply of free land and the great tide of immigra- 
tion are the two main causes of most of these ills. These two forces 
are bringing wages of unskilled labor below the starvation point, and 
to keep body and soul together the lower stratum of struggling hu- 
manity is crowding into filthy dens called tenements in order to reduce 
the cost of house rent. 



18 ELEMENTS OF ECONOMICS 

Thus through countless ages of progress, man has been increasing 
his power over nature, increasing his accumulations of wealth, in- 
creasing his capacity for enjoying the things of this world, increasing 
his desire for intellectual and spiritual enjoyment, and at the end of it 
all we have the old condition, the ages-old condition, confronting us; 
for it is ever the strong trying to crush the weak. At one time it 
was the soldier, at another time the great landlord; now it is the great 
monopolist we must fight; and we have at one end of the industrial 
scale multi-millionaires and at the other end a considerable portion 
of mankind starving for the necessities of life. To right these wrongs 
is the great all-inclusive industrial problem of the age. This does 
not mean that no progress has been made. The majority of man- 
kind in civilized countries are today far above the majority in any 
previous age in material comfort and in intellectual and spiritual 
welfare. But the task of climbing upward is much harder because 
entirely too large a proportion of what has been gained by centuries 
of progress goes to a very few. And while the majority are better 
off than ever before, a considerable portion of humanity are no better 
off than men were in the savage state. And in the United States es- 
pecially these great social problems of the unfortunate "submerged 
tenth" are new; for such problems have arisen only since our free 
land began to run short. 



ELEMENTS OF ECONOMICS 



19 



1 

SOC/AL DEVEL OPMENTS 

1 


ment 


'Prcdud/on 


The Econom- 
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fam//y 


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ship 



20 ELEMENTS OF ECONOMICS 

CHAPTER II. 

The Laws of Consumption. 

11. SOME DEFINITIONS. Before entering upon a discussion 
of the laws of consumption, several definitions must be clearly fixed 
in mind. Consumption is the destruction of goods. It may assume 
any one of three forms. When goods are destroyed for the purpose 
of producing other goods, as when coal is burned to give heat for 
converting water into steam, or wool is consumed in making cloth, it 
is productive consumption. When goods are consumed in order to 
satisfy our personal wants, it is final consumption. And when goods 
are destroyed without producing either of these two results, as when 
a house or factory burns, it is waste. 

Three terms are closely associated in economics, and for all 
practical purposes mean the same. These terms are, wants, needs, 
desires. In common usage the term want may mean desire or it may 
mean destitution; need means something one ought to have, or some- 
times it also means destitution. But in economics the three words 
simply mean desire, or a longing for something. Economic needs or 
wants or desires are those which are related to our getting a living, 
and are to be kept distinct from other wants, such as the desire of 
friendship . 

Our wants may be classified under two heads, existence wants and 
culture wants. The three great existence wants are for food, clothing 
and shelter. These may be called the animal or physical wants. 
Culture wants include desire for education, for satisfaction of the 
love of the beautiful in nature and in art, and desire for travel. 
These are wants that spring from our higher aesthetic and intellect- 
ual nature. Theoretically these two classes seem quite distinct from 
each other; but in practice there is no sharp dividing line between 
them. Our desire for shelter, for example, ieads us to build a house; 
but to what extent does the house serve to keep us warm and pro- 
tected and to what extent does it minister to our love for the beauti- 



ELEMENTS OF ECONOMICS 21 

f ul ? Or, just what sort of a house would minister to our animal wants 
without. appealing to our sense of the beautiful? And just how good 
would the furnishings need to be to supply only the demands of our 
physical nature? It is clear that no such sharp distinction can be 
drawn. The subject assumes a practical phase when we ask what 
the working classes consider as necessary for them to live in decency. 
Our American standard of decency in living would be far different 
from that of our ancestors of the colonial days or from that of the 
European working men of today, for the American workmen would 
include many things as necessary that were- not known in colonial 
times and are not now enjoyed by the working classes of Europe, es- 
pecially the lower classes of labor. And the question would assume 
a still more practical phase if the js:^te were to establish a minimum 
wage, for the minimum would naturally be high enough to afford a 
decent living. And a third phase of the question needs to be con- 
sidered, and that is the effect of our surroundings upon our energy 
and our character. Men cannot do as good work if they have the 
bare necessities, using that word in its strict sense, as they can do if 
they have some of the finer things of life. The man who goes to his 
work with the memories of a. pleasant home lingering about him, 
with the thoughts of a good book in his mind, with the echoes of 
song and music in his soul, goes with a greater power to do good 
work than he who goes forth from the home whose bare interior stirs 
within him none of the finer qualities of his nature. 

Another group of terms that are also closely associated are 
utility, value, wealth, price. Utility is the power of satisfyiny our 
wants. Four forms of utility exist. Some things have utility be- 
cause of the elements which they contain, as cotton fiber for making 
thread, when it is said to have elementary utility. When the cotton 
is made into thread or cloth or garments, or into a form to suit our 
wants, it has form utility. When the cloth is transported to market 
where people can get it, it has place utility added to it. And when it 



22 ELEMENTS OF ECONOMICS 

is brought to our door when we need it, place utility is again added 
and also time utility. The want that is satisfied may be for things 
for productive consumption or for final consumption. In the latter case 
the goods possess all four kinds of utility. Value is power in ex- 
change. Some things, such as air and sunlight, may have the great- 
est utility, but they are free goods and have ^o power in exchange, 
and hence have no value. Wealth is anything which has value. 
Price is value reckoned in terms of money. 

12. THE LAW OF SATIETY. The laws of consumption grown 
out of human nature and their proof is found in human experience. 
One of these laws, called the law of satiety, is, that any one want 
can be fully satisfied. This does not mean that any want can be so 
fully satisfied now that we shall not experience that desire in the 
future. It means that during any given time any want can be sat- 
isfied, if, of course, we have the commodity in sufficient quantity. 
Our want for bread, for example, can be completely satisfied from 
day to day, so that we would not consume any more if it could be had 
for the asking. Our want for hats, say, might not be so easily sat- 
isfied, but clearly there is a limit beyond which we would not be 
bothered with any more. Our desire for culture is still more ex- 
pansible and not so easily satisfied, and it may seem that this is an 
exception to the law. But desire for culture is complex, and if we 
take our desire for a particular line of culture and for the things that 
satisfy that particular line, we can see that such desire is not unlim- 
ited. The desire for money may seem an exception to the rule, but 
money satisfies no want directly, but is a means of satisfying all 
wants; and, as we will learn later, when one want becomes satisfied 
others spring up, hence it follows that though the desire for money 
cannot be satisfied, this does not contradict the law of satiety. 

This law is one of the most fundamental and far-reaching in 
economic science, for it underlies most of the other laws of con- 
sumption, and the laws of value are partly built upon it. No human 



ELEMENTS OF ECONOMICS 23 

progress would have been possible if this law had not been true, be- 
cause otherwise men would have spent all their time and energies 
satisfying the lower wants. 

13. THE LAW OF VARIATION OF UTILITY. Directly out of 
the law of satiety grows another law, the law of the variation of util- 
ity. This law is, that the utility of a given unit of a commodity 
varies inversely with the supply. That is, the more wheat there is 
the less importance we attach to a bushel of it. Since we want only 
about so much of it during the year, the more wheat there is the 
more fully can that want be satisfied, and as the want becomes more 
fully satisfied we care less about possessing an additional bushel. 
If apples were scarce we might be willing to pay two dollars a 
bushel for, say, ten bushels to put in the cellar for our winter's use. 
If they were very plentiful and sold at fifty cents a bushel we prob- 
ably might buy twenty bushels, if we had a large family. But if ap- 
ples sold at twenty-five cents a bushel we would not greatly increase 
our winter's supply, because we would not use them all. This illus- 
trates the practical importance of the law of satiety and of the law 
of vaHation of utility which grows out of the law of satiety. Upon 
these two laws are based largely the calculations of the commercial 
world. This illustrates also the close relationship between these 
two laws. The law of the variation of utility is really implied in the 
law of satiety, for if a want can be satisfied more and more com- 
pletely it simply means that our desire for each additional unit of 
the commodity grows less. 

14. MARGINAL AND TOTAL UTILITY. Out of these two 
laws springs the conception of marginal or final utility, which seems 
so puzzling to those just beginning the study of economics, but which 
becomes perfectly simple if we will just keep in mind the above laws 
of consumption. Marginal or final utility is the utility of the last, or 
least important, unit of the supply. The utility of each unit of a 
given supply is of course the same. But since the utility of each 



24 ELEMENTS OF ECONOMICS 

unit diminishes as the supply is increased, it is convenient to think of 
the last unit added to the supply as the marginal or final unit, and 
consequently as having the least utility, or as being the least im- 
portant unit of the supply. Salt, for example, has several uses. 
Its most important use is for cooking and preserving food. A less 
important use is to melt the ice on the walk in winter or to kill weeds 
in summer. If that were the least important use to which salt could 
be put, and if there were enough to supply all needs for the table, 
and for cooking and preserving food and some to use for killing 
weeds, or melting ice, this would measure the marginal utility of salt 
or the utility of any unit in a supply that large. But the idea of 
marginal utility applies even if a commodity has but one use, because 
of the law of satiety. Take bread for example. Suppose it had but 
one use, that of satisfying the hunger of human beings. If there 
were only enough to partially satisfy our wants for that kind of food 
so that we would be compelled to satisfy the remainder of our want 
with something less suitable and less desirable, the marginal utility 
of wheat would be high. If on the other hand there were an abun- 
dance of wheat so that we could get all we wanted of it, its marginal 
utility would be low. 

Marginal utility is to be distinguished from total utility, which 
is the utility of the whole supply. In case of a necessity, say of the 
total wheat crop of any year, its total utility is infinite, in case we 
could get no other food or substitute, for we would starve without it. 
But the marginal utility of that same commodity may be small. 

There are some interesting applications of this distinction be- 
tween total and marginal utility, the most important of which is that 
marginal and not total utility measures the importance of goods. In 
other words, it is marginal and not total utility that helps determine 
the price of an article. From this it may happen that a large grain 
crop might sell for less than a small crop, that is, the total value of 
the large crop would be less than the total value of small crop; but 



ELEMENTS OF ECONOMICS 25 

this is not true of the total utility of the large crop, because total 
utility increases with the quantity. 

15. THE LAW OF DEMAND. Another great law of the business 
world is the law of demand. By demand is meant the offer to buy. 
The amount of a commodity that we will buy depends upon three 
things, its marginal utility to us, the price, and the amount of 'our 
income. If the marginal utility is high, that means that our desire 
for that thing has not been very completely satisfied and our demand 
for it is strong. If the marginal utility of a commodity is low it 
means that our desire for it has been fairly well satisfied and we do 
not care very much about any more of it. The utility of some 
things does not depend upon their quantity but upon their quality or 
style. If, for example, a hat is out of style its selling price will drop 
perhaps to a small fraction of its price when it was in style, though 
there may be but few like it on the market. The utility, that is, the 
marginal utility of other things in which style plays no part, as wheat, 
for example, depends upon the quantity. Our conclusion thus far is 
that demand varies directly with marginal utility. 

The price of an article affects its demand because our income 
is limited. If the price of an article goes up and we purchase the 
same amount that we did when the price was low we will be de- 
prived of something we are accustomed to, or else we shall have to 
increase our expenditures for final consumption and consequently have 
less of our income to "save for the rainy day." If the price goes down 
we are tempted to buy more in order the more completely to satisfy 
our desire for that thing, unless our desire has already been satisfied. 
Then, too, it may be that by purchasing more of the article that has 
fallen in price we can decrease our expenditure for some article that 
is more costly but which answers the same purpose as the cheaper 
article, and by so doing we could reduce our expenditure for final 
consumption or buy something we have before wanted but considered 
beyond our me^ns. Hence it follows that demand varies inversely 
with the price. 



26 ELEMENTS OF ECONOMICS 

Demand depends also upon the amount of our income. If our in- 
come increases we will buy more of all those things for which our 
desire had not already been fully satisfied. Ordinarily, this would 
mean that our demand for all but a few great staple articles such as 
bread, salt, and other articles of absolute necessity, would increase, 
because in most cases we do not consume all we would if we had 
more money. Most people would buy more and better clothes, more 
and better furniture, have better houses, and increase their expendi- 
ture along many lines if they had more income. We may therefore 
put all three things together and state the law of demand as follows: 
Demand for a commodity varies directly with its marginal utility and 
the amount of our income and inversely with its price. This is the 
great law that all business men must understand and take into ac- 
count in their commercial transactions. 

1-6. THE LAW OF ELASTICITY OF DEMAND. In our dis- 
cussion above there is implied another law which is called the law of 
elasticity of demand. This law is, that demand for necessities 
changes less than demand for luxuries, with changes in price or in 
our income. Things that are really necessary to support life we 
must have and the price has little to do with the amount demanded, 
unless some substitute can be found for them. Usually this is true 
to some extent, and for that reason the demand even for necessities 
varies with the price. But the great staple articles of food and cloth- 
ing people must have in fairly constant quantities, and changes in 
price do not affect demand very greatly. But if the price of a luxury 
goes up demand must fall off from all those who have only a moderate 
income, for if they continued to consume the same quantity of luxuries 
as before they would not have enough left with which to satisfy the 
more urgent needs. If the price of luxuries fall we are tempted to 
buy more, in order more completely to satisfy desires only partially 
gratified before. But if the price of necessities goes down we will 
not demand very much more or possibly no more because we have 
about all we want of necessities, unless we are of that unfortunate 



ELEMENTS OF ECONOMICS 27 

class who are underfed and insufficiently clothed. We may lay it 
down as a general rule, therefore, that demand for necessities is less 
elastic than demand for luxuries. 

From this law some interesting and important changes in prices 
will follow changes in supply. If there is a comparatively slight de- 
crease in the yield of wheat or corn it will send the price very high. 
Since people want about so much of these things, producers and mer- 
chants will take advantage of the shortage and boost prices, knowing 
that people will buy, regardless of the p/rice. Within a few weeks 
in 1915 the price of sugar doubled on account of the war in 
Europe; but merchants say they can see no decrease in demand for 
sugar. If on the other hand there is an extra large crop of grains, 
prices will go very low, because merchants and producers know that 
there will be difficulty in getting rid of the whole supply, and they 
lower prices to tempt people to buy more. Competition hastens this 
process, since each producer and dealer fears that rivals will lower 
prices first and supply the demand. An oversupply of luxuries on 
the other hand would have no such a depressing effect on prices, 
since a slight drop in prices might increase the demand enough to ab- 
sorb the supply; while a shortage in a luxury would not send prices 
so high as in case of a necessity because a rise in prices decreases de- 
mand very greatly, specially of an article used quite widely among the 
people. Thus there is a law of elasticity of price, which may be 
stated thus: the price of luxuries changes less than the price of 
necessities with changes in supply. 

The law of elasticity of demand has many applications in the 
business world . One of the most important applications is made by 
monopolists. In case a monopolist controls a necessity he can injure 
people greatly because he can put the price at an unreasonably high 
figure without greatly decreasing demand. If the monopoly controls 
a luxury, however, consumers are not so completely at its mercy, be- 
cause if the price goes up they can cease to buy and then the monopo- 
list will "come to time" and keep his prices reasonable. 



28 ELEMENTS OF ECONOMIGS 



17. THE LAW OF THE ECONOMIC ORDER OF CONSUMP- 
TION. Closely associated with the genemlj law of demand is. another 
law called the law of the economic order of consumption ; which is, 
that the commodities we consume and their relative quantities de- 
pend upon their relative marginal utility and relative prices and the 
amount of our income. It will be observed that the same forces that, 
determine the conomic order of consumption also (determine demand . 
The economic order of consumption is in fact only the result of the 
relative strength of our demand for different things, while the law of 
demand looks at the strength of our demand for a single thing only,. 
As a matter of fact, however, when we are considering whether or not 
we will buy more of a, certain thing we either consciously or uncon- 
sciously think of what it will cost us as compared with something 
else we want, and whether the thing in question will give us more 
enjoyment than something else, and whether we should buy anything 
more or save our money for further use. Hence these two laws, the 
general law of demand and the law of the economic order of consump- 
tion are looking at the same conditions and the same forces but from 
different points of view. 

Let us be sure that we know what the economic order of con- 
sumption is and what the law governing it means. The thing about 
which this law is concerned might be called the family or private 
budget. The economic order of consumption does not refer especial- 
ly to the order in which things are purchased and consumed, though 
the name implies that; but it refers to the amount of our consump- 
tion of different things during, say, the year. Some people include 
in their consumption silks and satins and furs, automobiles, splendid 
mansions, and all sorts of things; other people lay up treasures in 
books, works of art, and things that appeal to the intellectual nature; 
still other people consume none of these things, or but very few. 
Again two persons might include in the list of things they consume 
about the same articles, but the relative amounts consumed by the 
two persons might be very different. The law of the economic order 



ELEMENTS OP ECONOMICS 2& 

of consumption tells us why these facts are so . 

Why does the range of our consumption and the relative amounts 
of our consumption depend upon relative marginal utility, relative 
prices and the amount of our income? Why do some people buy au- 
tomobiles, for example, and some not? The answer is simple. Some 
cannot afford it, by which is meant that if they buy luxuries they 
will deprive themselves of things more necessary and hence have 
less pleasure with the automobile than without it. Others may have 
plenty of money to spend for such things but do not care for autos, 
that is, they get more pleasure out of other forms of luxury. Gener- 
ally speaking, the smaller the income the greater is the relative 
proportion that must be expended for necessities. In too many 
cases, however, perverted tastes cause people to spend a large portion 
of a small income upon such things as liquor, tobacco and harmful 
amusements, and as a result not enough income is left for necessities . 
This law tells us many things about the consumption of the commu- 
nity. If some things are especially cheap we are tempted to buy 
more of them and less of something else, so that we may get more 
satisfaction out of the total expenditure, or so that we may get the 
same satisfaction for less money and lay by more for the future. 
If apples are fifty cents a bushel and oranges three dollars a bushel, 
those whose income is moderate in amount would spend considerably 
more on apples than on oranges. But if apples are as high as or- 
anges people would buy fewer apples and more oranges. 

This law gives us a basis for the study of the family budgets of 
the community. It also suggests the study of right living and wrong 
living. It leads us into the study of extravagance, of perverted 
tastes, of right and wrong conceptions of the relative value of things 
in human life. If, for example, we discover people with small in- 
comes trying to copy after the rich in their expenditure, we con- 
clude that they are not wise in this matter, since too small a portion 
of their income, or none at all, is going to the support of their old 



30 ELEMENTS OF ECONOMICS 



age. Their judgment is wrong, since they value present show more 
than decent comfort in their declining years. If again we discover 
men spending for liquor and tobacco, even in moderate quantities, we 
conclude that they too have perverted tastes and poor judgment, 
since they are feeding depraved appetites to the detriment of their 
better nature. If again we discover the rich spending large sums on 
automobiles, dress, parties, and amusements, and comparatively little 
on books, music, works of art, we conclude that their tastes too are 
perverted, and that our civilization has failed to create in them de- 
sire for intellectual culture. And these conclusions should lead us 
to examine our social institutions to see why they are thus failing to 
give the people right tastes, why our civilization is not leading men 
upward more into the higher' life instead of creating in them a desire 
only for material things. 

18. LAW OF DEVELOPMENT OF WANTS. Such a study 
would lead us to discover another law of consumption, the law of de- 
velopment of wants, which is, that when existence wants become 
fairly well satisfied culture wants spring up without any assignable 
limit. It should be noted that this law has three distinct points to 
it, or in other words, it is composed of three distinct statements. 
The central idea is that new wants develop; but they will not develop 
until after the lower wants are fairly well satisfied, and the number 
of new wants that may spring up we have no means of knowing, 
since they are now growing more rapidly than ever before, after 
thousands of years of development. This law is true because of 
human nature. Man alone of the animal creation is endowed with 
the capacity thus to progress. The conditions under which new 
wants develop are as stated because of human nature. These con. 
ditions are simply two primary laws of consumption incorporated 
into this more complex law. These two primary laws, it will be ob- 
served, are the law of satiety and the law of relative intensity of 
wants . 

This law has a very important application which our social 



ELEMENTS OF ECONOMICS 31 

workers and society in general are beginning to understand. For 
years our "college settlement" workers and "slum" workers seemed 
to be under the delusion that what the lower classes chiefly needed 
was religion and Sunday schools. But such workers now realize that 
men cannot be lifted bodily into the higher life and that they cannot 
develop into it unless they first have means of satisfying the lower 
wants. Little can be done to elevate people into a higher life if 
their income is insufficient to enable them to satisfy existence wants. 
•Generally speaking, man develops through a slow process of evolu- 
tion, though the power of religion often suddenly reforms men who 
have lived in the midst of higher things but have cast off their in- 
fluence and followed the downward road. Not only among the de- 
graded elements at the bottom of the social scale do We find the great 
law of development of wants illustrated; we find it exemplified among 
the working classes and other people with small incomes. The more 
enlightened portion of the community has a constant struggle to in- 
duce those classes to give their children a sufficient education to en- 
able them to develop into men of a higher type. Most people are 
satisfied with the rudiments of an education and satisfied if their 
children have the same . And if the time ever comes when the masses 
will care much about real culture it will be when incomes are suffi- 
cient to enable them to satisfy much more fully than they can now 
the wants at the lower end of the scale. The masses will never ex- 
perience a very keen desire for things that cultivate the mind and 
enrich the soul so long as they live in hovels or dingy flats and take 
their pleasure rides in crowded street cars, while their neighbors 
live in splendid mansions and ride in automobiles. And if some few 
should aspire to give their children a higher education it would be 
chiefly with the hope that their children may some day own a fine 
mansion and an automobile, rather than that they may enjoy a 
higher intellectual and spiritual life. 

This law of development helps us to understand another phase 
of our civilization, and that is what is called its materialistic nature » 



32 ELEMENTS OF ECONOMICS 

A large portion even of the rich seem to seek pleasure almost ex- 
clusively in material things. This is explained partly by the ex- 
pansibility of our wants when bare necessities are provided for. In 
the realm of desires that lie midway between absolute necessities 
and purely intellectual and spiritual wants are the desires for the 
finer material things and forms of pleasure which have in them 
something of the intellectual and spiritual element but which largely 
satisfy physical enjoyment. In fine houses and furniture and auto- 
mobiles there is much that elevates and refines; but such material 
things do not primarily cultivate the mind as does the study of books, 
of nature, and of art. Modern invention has so multiplied these 
material things that give us mainly physical pleasure, and there 
seems to be so much room for expansion of this class of wants, that 
the development of the real higher life of the race is somewhat 
checked. These finer material things are good to have and man must 
have them to develop properly; but when we spend so much of our 
time and means and energy in seeking pleasure from these material 
things that the study of good books and of nature and art, and even 
attendance upon divine worship, is neglected, the too great multipli- 
cation of these material things is much to be regretted. 

19. ENGEL'S LAW. Economists include among the laws of 
consumption a law named from a German statistician, Dr. Engel. 
This is not a law distinct from those already considered, but it merely 
illustrates these laws of consumption. Dr. Engel made a detailed 
study of family expenditures among the working classes in Saxony, 
the incomes of the families ranging from $225.00 to $1100.00 a 
year. His conclusions were that as the incomes increased, (1) ex- 
penditures for food increased, but not in proportion to the increase 
in income, (2) expenditure for clothing increased nearly in proportion 
to increase in income; (3) expenditure for rent, fuel and light in- 
creased in proportion to income; and (4) expenditure for education, 
recreation, health, etc., increased more than income increased. His 
tables show some remarkable results. Families with about $300.00 



ELEMENTS OF ECONOMICS 33 

a year income expended about $180.00 on food while families with 
$1000.00 a. year income expended about $500.00 on food. This shows 
either that the families with the smaller income are greatly underfed 
or else the families with the larger income are extravagant. In- 
vestigation would doubtless show that both conditions exist. Investi- 
gations by the U. S. Department of Labor show results similar to 
those obtained by Dr. Engel, though there are some interesting 
variations in details. For exaftiple, in the U. S. the expenditure 
for food increased much less than in Saxony, with the increase in in- 
come, and the American family with $1000.00 a year income spends 
considerably less than the Saxon family with the same income, the 
former spending about $350.00 for food and the latter about $500.00. 
On the other hand, the expenditure of the American families for 
education, health and recreation increased much more rapidly, with 
increase of income, than the expenditure of the Saxon families for 
such things. This indicates that the American working classes 
spend more wisely than the Saxon working classes, if the investiga- 
tions in both cases included families typical of their class. 



L/^^S or CONSUMPT/ON 

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34 ELEMENTS OF ECONOMICS 

CHAPTER III. 

Problems of Consumption. 

20. THE STANDARD OF LIVING. Problems of consumption 
center around the standard of living. Of these problems three are of 
special importance, the housing problem, the liquor problem and the 
extravagance of the rich. These three problems will be considered 
in this chapter. 

The standard of living means either of two somewhat different 
things. It may mean merely the present conditions under which one 
is living, without reference to any ideal in the person's mind, or it 
may mean an ideal condition which one is struggling to reach or main- 
tain. In the former case people are just drifting with the tide, so to 
speak, taking whatever comes along without attempting to better 
their condition. In the latter case people are either endeavoring to 
maintain their condition against adverse circumstances or else they 
are trying to improve their standard of living for themselves or 
their children. 

The standard of living in either sense is of vast importance to 
society, for it measures very largely the height to which civilization 
has risen or will rise in the future. It makes a vast difference to the 
friends of humanity striving to help elevate the lower classes, 
whether those classes are just drifting without any definite standard 
or are struggling to improve their conditions. In the latter case social 
workers meet with a ready response from the lower classes when as- 
sistance is offered, and in the other case those classes resent any at- 
tempts to help them. The standard of living is important in another 
sense. The conditions under which children are brought up determine 
largely their character. It is impossible to tell just what part hered- 
ity plays in determining character, but experience shows at least that 
environment is a powerful factor in determining character. And the 
effects for good or for ill are cumulative. If people start on the 



ELEMENTS OF ECONOMICS 35 

downward road they drag the coming generation down, and each 
succeeding generation is lower than the one preceding it. Such was 
the history of Rome during the later centuries of its existence. If a 
nation is on the upward road each generation rises higher than the 
preceding, so long as conditions are favorable for the succeeding 
generation. In the standard of living, therefore, civilization is at 
stake . 

This standard of living includes the sum total of our material 
surroundings, the food wa eat, the clothes we wear, the houses we live 
in, the books we read, our amusements, and the whole round of our 
daily lives. And each and all of these things has a decided effect 
upon our character. Even the clothes we wear affect our character 
and that of others around us, for if our style of dress is immodest, 
the purity of our thoughts is contaminated and the contagion spreads 
more or less to those around us. And so with each item of our ma- 
terial existence, for each has its effect upon our character. 

21. THE HOUSING PROBLEM. Probably the most important 
problem of consumption is the housing problem. The home is the 
chief character builder. During the first few years of the child's life, 
the home, with its surroundings, whether city streets, back yards 
and alleys, or the broad fields, is the only social institution with 
which the child comes in contact. During later childhood the school 
and the church begin to add their influences to those of the home. 
But even then the child is at school but a few hours in the day and at 
church but a few moments a week, if at all, and the home continues in 
most cases to be the chief factor in the child's life. 

Our housing problem is a vast one; for it is estimated that about 
ten millions of people in the United States are living in wretched 
places called homes which are entirely unfit for human habitation. 
The housing problem has until recently been considered a problem of 
private charity to a considerable extent. But it is at once apparent 
that the problem is too vast for private charity, even organized private 



36 ELEMENTS OF ECONOMICS 

charity, to deal v/ith. Morever, some consistent, proper, uniform policy 
must be pursued if we are to remove the causes of the evil conditions 
in these so-called homes, and it requires the authority of law to carry 
out such a policy. These ten millions of people must themselves be 
reformed and be given an opportunity to improve their conditions 
before there can be any improvement in their homes. If, for example, 
low wages or drunkenness were causes of people living in miserable 
dens, it would require the power of public authority to deal with the 
situation and attempt to remove the causes. 

Again the housing problem has been considered a local one. But 
any conditions which so vitally affect the lives of such a large portion 
of our population and which are found in every state in the Union and 
in every considerable city of every state, are not a local matter. Such 
evil conditions breed vice and crime and the whole people suffer in 
consequence. If the city breeds criminals and beggars they prey 
upon city and country districts alike. If a degraded city popula- 
lation enables a corrupt political ring to maintain its power over 
city, state or national governments, the whole country suffers. 
Hence, the housing of these ten millions of people is a matter de^ 
manding the cooperation of city, state, and nation. This coopera- 
tion is necessary not merely because all are affected, but because 
cooperative effort is necessary in order to carry out any plans to re- 
move the causes of bad housing conditions. For instance, just now 
the problem of unemployment, one of the causes of bad housing 
conditions, is being much considered, and social workers suggest 
that public employment bureaus be established by the cities, by 
the state and by the national government, in order to cooperate if 
there is any demand for labor in other parts of the country where 
laborers are scarce, and if work cannot be found for all with private 
employers, the different governments should employ them on public 
works during the dull seasons. To conclude, the housing problem is 
a public problem of vital importance, to be solved by the cooperative 
efforts of cities, states, and the nation. 



ELEMENTS OF ECONOMICS 37 

22. EVIL CONDITIONS. It is impossible in a few pages to give 
an adequate conception of housing conditions in our "slums"; the 
essential points will therefore be touched upon briefly. Bad condi- 
tions may be grouped under five heads, overcrowding, foul air, lack 
of sunlight, filth, ugliness. Overcrowding, especially in large cities, 
has two phases, too many in a given space of the city and too many 
per tenement. In our smaller cities the latter phase of congestion 
is the more pronounced. In New York City there are eleven blocks 
in the lower part of the city that contain thirteen hundred persons 
per acre. At that rate little Delaware would hold all the people in 
the world. The evils of such overcrowding are manifest. Bad air is 
the inevitable result, for such a swarm of humanity must make the 
air foul, outdoors as well as in. Lack of play space for children is 
not the least of the evils of congestion. In old Greenwich Village, a 
section of New York City, there were, according to an official report 
of 1914, but 16.000 square feet of play space, and 24,000 children 
lived in the district. Greenwich Village is on the lower West side of 
the city, a district not hitherto considered bad enough to need special 
attention, efforts to secure more play space having been directed to- 
wards the lower East side. In all our large cities play, normal, 
healthful play for children, is out of the question. Under such condi- 
tions it is impossible for the children to grow up with strong, healthy 
minds and bodies. 

The worst phase of congestion is, too many per tenement. In 
this respect our small cities are not far behind the larger ones. Fam- 
ilies of four or five often live in one or two rooms and take in two 
or three boarders and lodgers. In New York City about 18 per cent 
of the families live in one room and often take in one or two lodgers. 
In small tenements of four or five rooms there is no distinction be- 
tween bedroom, kitchen or dining room at night, the floor of each 
room being literally covered with mattresses filled with people of all 
ages and both sexes. In the daytime the mattresses are piled up in 
one corner of the rooms. Sometimes two or three rooms of the small 



38 ELEMENTS OF ECONOMICS 

tenements are rented to two sets of lodgers, one set occupying them 
at night and the other set in the daytime, the day lodgers being 
ixight workers, or tramps, night prowlers and thieves. The bad air, 
the filth, the indecency under such conditions can better be imagined 
than described; but no one can imagine the foulness of the air in 
such places until he has actually stepped from the open air into one 
of these dens. 

The lack of pure air and sunlight is also due to faulty con- 
struction of the tenements. Great blocks of houses are solidly packed 
together, four or five stories high, and as a result of this method of 
construction most of the rooms have no windows opening out into the 
broad daylight, but have windows and doors opening into other rooms, 
and often these other rooms have no outside door or window, but 
have windows opening upon small, narrow air shafts, .three or four 
feet wide. These air shafts often get filled at the bottom with gar- 
bage, and windows are tightly closed to keep the foul air from com- 
ing into the rooms. 

The filth in many of these tenements and around them is indes- 
cribable. Floors are black with dirt, both in the rooms and in the 
hallways, the latter seemingly not only unwashed but unswept from 
one year's end to another. Garbage in the air shafts, in the back 
yards, in the alleys and even in the streets; rats and mice and vermin 
everywhere, laden with contagious disease; flies and insects in- 
swarm's bringing their portion of dis-aase germs; such in brief out- 
line are the conditions in the slums of our cities, great and small, 
such conditions as one would scarcely beli-sve could exist, unless 
he had seen them with his own eyes. 

The general results of such conditions are inevitably a grave 
menace to society as a whole. These slums are hotbeds of disease, 
vice and crime. Children are stunted in mind and body and depraved 
in morals. Deprived of God's free air and sunlight, with no chance 
even in the daytime to play as normal children should, housed among^ 



ELEMENTS OF ECONOMICS 39 

vagabonds, beggars and thieves — for such are many of the lodg-ars — 
filth, disease, ugliness everywhere, it is no wonder that 90 per cent 
(the estimate of Jacob Riis) of our children in reformatories come 
from the slums. It would be far wiser and more humane for society 
to reform the dens whence come these poor unfortunates. As Riis 
humorously put it, we should recognize the fact that we are our 
brother's keeper, rather than his jail keeper. 

23. CAUSES OF THESE CONDITIONS. Why will human be- 
ings live in such surroundings? There are many reasons, five of 
which are especially emphasized by social workers, (1) low wages, 
(2) drunkenness, (3) laziness, (4) factories congested in certain 
parts of cities, (5) the low standard of many, especially foreigners, 
coupled with an intense struggle to save from an exceedingly low 
wage. Not all of the five causes would apply to the same people, 
but two or more might sometimes apply. The relative importance 
of these causes is not easy to determine, but wage statistics would 
indicate that low wages is the chief cause. According to the latest 
available data, published both by the Sta,te bureaus of labor and by 
the United States government, about one-tenth of the adult male 
workers in this country earn less than $325.00 a year, while half our 
wage earners get less than $500.00 a year. Any one can readily prove 
from his own knowledge without much investigation that a family of 
four or five, the average size of a family, could not possibly live in 
decency on three hundred and twenty-five dollars a year, and with five 
hundred dollars a year the struggle for a decent living would be a 
hard one. With prices such as have prevailed for the last ten years, 
a family of five could not provide themselves with food for less than 
three hundred dollars a year, and it would have to be the plainest of 
food at that. A decent house or flat of four rooms would cost on the 
average not less than one hundred fifty dollars a year, and clothing 
of the plainest kind would cost not less than fifty dollars a year. 
Thus it appears that these three items alone amount to more than 
half our laborers earn, counting only the head of the family as a 



40 ELEMENTS OF ECONOMICS 

bread winner. The results are inevitable. In order to live at all, peo- 
ple must crowd into the worst tumble down shacks obtainable and 
often the mother and little children must become wage earners, to 
the very great injury of both. Many, made desperate by such a 
hopeless struggle for mere existence, seek to drown their troubles 
with strong drink and make their condition worse. Thus drunkenness 
is often the result of poverty rather than the cause; and some of our 
social workers assert that drunkenness is more often the result than 
the primary cause of poverty. 

Pure laziness no doubt is a cause of these conditions in many 
cases, especially of the filth, for water is easy to get and a little 
work would keep things clean. In many cases the income is suffi- 
cient, but foolish expenditure, including the drink bill, does not leave 
enough for necessities. Then, too, factories are often congested in 
one part of the city, and in order to be near their work, laborers 
crowd into the tenements, and since rents are usually high in the 
thickly settled parts of a city, intense overcrowding is necessary to 
bring rents down to a reasonable figure. Finally, large portions of 
our immigrants have an exceedingly low standard of living but are 
anxious to lay up something out of their pittance of an income, in 
order to return to Europe and live in comfort the remainder of their 
days. Hence, they are willing while here to put up with almost any 
condition, if they can only save. 

24. REMEDIES. No remedy of any evil can be effective unless 
it removes the causes of the evil. Therefore, if we would find any ef- 
fective remedy for bad housing conditions we must discover some 
way of removing the causes of such conditions. From the nature of 
the case no one remedy would remove all the causes, within a reas- 
onable length of time. The most fundamental of all remedies, and 
the one that will go farthest in removing the different causes of bad 
housing conditions, is to give a living wage. This would remove a 
large part of the cause for drunkenness and in time, that is, in the 



ELEMENTS OF ECONOMICS 41 

course of a few generations, the natural tendency of man upward will 
reduce the problem from the stupendous proportions it now assumes 
to one of small dimensions. But how to secure the living wage is 
the difficult problem. But however difficult, this result must be at- 
tained or all other remedies combined must utterly fail, except pos- 
sibly that cleanliness might be attained in some degre-s by judicious 
help and advice of wise friends of these unfortunate people. 

But how shall wages be raised to a living standard? Some 
countries are adopting a minimum wage law, and about a dozen 
American States have adopted such a law, but laws in this country 
apply only to women and children, who are not the chief bread- 
-winners; and these laws do not therefore touch the heart of the 
problem. If such laws applied to men also they would be more ef- 
fective in enabling the working classes to live in decency. Low 
wages, however, are caused by an oversupply of unskilled labor and 
inefficiency. A minimum wage law alone would not, except after a 
long time at least, and through the slow rise of the standard of liv- 
ing and the adjustment of the supply of labor to the demand, lessen 
the oversupply of labor; nor would it increase its efficiency, unless 
the state offered more opportunity for industrial education. The 
most important cause of our present oversupply of unskilled laborers 
is immigration. The logical remedy therefore is a restriction of that 
class of immigrants. We would not need to prohibit immigration, 
but to exclude a much greater number of the less desirable sort. 
The most authoritative recommendation for a considerable restriction 
of immigration comes from the recent report of the Federal Immi- 
gration Commission, a commission composed of some of the leading 
economists and statesmen of the country, appointed especially to in- 
vestigate our immigration problems. A bill intended to decrease the 
number of immigrants and raise the standard of those admitted has 
three times passed both houses of Congress, but was each time de- 
feated by the presidential veto, the first being vetoed by President 
Cleveland, the second by President Taft and the third by President 



42 ELEMENTS OF ECONOMICS 

Wilson, the main objection in all cases being to the literacy test. 

In order to increase efficiency of laborers, more opportunities 
should be given for young men to get vocational training. As we 
consider the problem later under the head of problems of production, 
we mention it here merely to make our remedies for low wages com- 
plete. 

Another helpful remedy seeks to reduce unemployment by es- 
tablishing employment bureaus by cities, by the states and by the 
national government. Often laborers are wanted in different parts 
of the country, but without public employment bureaus, well or- 
ganized and connected all over the country, those desiring help 
and those desiring work do not get together. In response to 
this need several states and many cities have established em- 
ployment bureaus, and the National Department of Labor is 
now cooperating with the Post Office Department to bring the 
manless job and the jobless man together. If all these var- 
ious measures, the minimum wage laws, restriction of immi- 
gration, industrial training, better distribution of laborers by em- 
ployment bureaus, could be secured, we would be on the road 
to a solution of the housing problem. 

But other remedies are needed to help bring about results more 
effectively and more quickly. We need a wiser economy in spending. 
Strong drink should be eliminated. And greater economy in the 
home would make wages go farther. Many poor people buy baker's 
bread, which costs twice as much as it would to bake it at home. In 
many cities charitable organizations are employing trained house- 
keepers to instruct the poorer classes in more economical methods 
of housekeeping. 

A third class of remedies needed includes those which seek to re- 
form the tenement. Many cities have tenement-house laws which 
prescribe the conditions as to light, ventilation, plumbing, and other 
provisions which should make the tenements more habitable. Greedy 



ELEMENTS OF ECONOMICS 43 

landlords have fought such legislation most vigorously, as they do 
not wish to lose any of the twenty or thirty per cent which they 
often make on their investments. But in a few of the large cities 
much has been done to improve the new tenements that are being 
built and some of the worst dens have been condemned and torn 
down. Much remains to be done yet along these lines; in fact, taking 
the country over, the "battle with the slums" is not half finished^ 
and in most of our smaller cities the problem has not been attacked. 
But even where fairly good tenement-house laws have been enacted^ 
those relating to ovetrcrowding in tenements are wholly ineffective. 
After a generation of struggle to prevent overcrowding in a few of 
our great cities conditions are worse now than ever before, because 
the tendency to overcrowd is so strong that laws to prevent it are a 
dead letter. In the smaller cities this evil is just beginning to be 
serious, owing to the recent coming of the immigrant to the smaller 
cities and the development of manufacturing in them. European 
cities attack the problem by building municipal tenement-houses- 
which are rented to working men at a low rate, and inducements are 
offered the renter to become the owner of his home by paying for it 
on the long-time installment plan. America, however, is as yet too 
individualistic in its theories to adopt this plan. But if all the other 
plans here suggested could be adopted we could make some headway 
against this vast housing problem which is becoming more serious- 
every year and which threatens greatly to interfere with our progress 
towards a higher and a nobler civilization. 

25. THE LIQUOR PROBLEM. Scarely less important than 
housing reform is the liquor problem, and in some respects the latter 
is the larger problem of the two, partly because it affects more peo- 
ple and partly because a very large element of our population is 
fighting against any effective reform. The first great fact that 
confronts us as we view the situation is the enormous size of our 
drink bill. In 1912 the people of the United States consumed over 
two billion gallons of alcoholic liquor at a cost to the consumer of 



44 ELEMENTS OF ECONOMICS 

over two billion dollars, the per capita consumption being twenty-two 
gallons, at a cost of about twenty dollars. We spend more for strong 
drink each year than the total value of all the hogs and cattle in the 
country, more than twice the value of our wheat crop, more than the 
cost of all grades of our government, and more than three times as 
much as we are spending for education. When a nation spends 
three times as much for strong drink as it does for education, when 
more education is much needed, there is something radically wrong 
with its estimate of the relative value of things. But the outlook 
is encouraging. The maximum per capita consumption was reached 
about 1896 or 1897, and since that time the tide has risen no higher 
and the indications are that during the last two years it has receded 
a little. The liquor interests are becoming somewhat alarmed at 
the outlook, as th-ay fear that the great temperance wave now sweep- 
ing over the country will in time destroy them. 

The evil effects of alcohol are well known and there is little ex- 
cuse for a people being ignorant of those effects. Even the drunkard 
himself knows in his sober moments that excessive use of alcohol 
weakens him mentally, physically and morally. Drunkenness is a 
very powerful factor in helping fill our jails, penetentiaries, alms- 
houses, and asylums. According to the report of the Mass. commis- 
sion to investigate drunkenness, alcohol was the cause of 67 per cent 
of the commitments to prison during the year ending Sept. 30, 1913. 
Even moderate drinking is now considered by all scientific men as 
detrimental. Says Bishop Lawrence, "The time has passed when 
any intelligent person claims that strong drink makes a man more 
efficient. Industrial efficiency is driving the drinking man, even the 
rather moderate drinking man, to the wall." Many employers of 
labor, especially the great corporations, absolutely forbid their em- 
ployees the use of alcoholic liquor, even in moderate quantities, not 
only when on duty but when off duty, and an infraction of the rule 
leads to dismissal. These employers of labor are not temperance 
fanatics, but they know from experience that even moderate drinking 



ELEMENTS OF ECONOMICS 45 

lessens the working ability of their men. Says President Eliot of 
Harvard University, "The alcoholism of the white race must be over- 
come or that vice with the licentiousness that it provokes will over- 
come the race." 

26. SOLUTION OF THE PROBLEM. The temperance forces 
seem to rely largely on closing the saloons as a sufficient and proper 
remedy. Their opponents claim that society has no moral right to 
forbid a man from drinking, and that the destruction of the liquor 
business would be economically injurious to society as a whole. Or- 
ganized society exists for the benefit of the people. If any industry 
is proven to be injurious to society, that is, to the individuals com- 
posing that society, it is not only the right but the duty of society 
to suppress that business. A man has no moral right to do anything 
that injures the other members of the community. The saloon busi- 
ness has been condemned by ages of experience, and if society thinks 
the business injurious it has a right to suppress that business. 
Moreover, an individual has no moral right to do that which injures 
himself and incapacitates him for performing his economic and polit- 
ical duties. Man is the natural bread winner, and he has no moral 
right deliberately to lessen his power to support a family, nor has he a 
right to weaken his own mental and moral nature and thus unfit 
himself for citizenship. And if a man is too weak to resist the 
temptation to destroy himself, it is the duty of society to save him 
from destruction, for we are, by every law, human and divine, our 
brother's keeper. 

The friends of the saloon claim that the destruction of the liquor 
business would injure industry generally. First, they urge, all those 
engaged in the business would be thrown out of work. That would 
injure merchants and producers who had been furnishing them with 
goods. Then the demand for grain and other materials consumed in 
the production of liquor would be destroyed, and a vast injury would 
result to business generally. This argument is exceedingly shallow 
and perfectly fallacious. The results indicated would be merely tem- 



46 ELEMENTS OF ECONOMICS 



porary, until society got itself adjusted to a new economic order of 
consumption. The argument of the friends of the saloon overlooks 
the great laws of consumption and assumes that if men should cease 
to drink liquor their powers of consumption of other things would 
remain stationary. The simple fact is that if the consumption of 
liquor is cut off, demand for other things will immediately increase. 
Those that now go hungry and half clothed because of the saloon 
business would be better fed and better clothed. The suppression of 
the liquor business would not diminish man's capacity for consump- 
tion, but a new and better consumption would spring up. Thus 
those temporarily thrown out of employment by the closing of the 
saloons would find other employment where they could help supply 
society with things beneficial to it rather than harmful. But society 
should give needed aid to those temporarily thrown out of work and 
it should compensate owners of property made valueless by de- 
struction of the liquor business. 

But the suppression of the saloon is not enough. The saloon is 
the poor man's club. Men must have amusement, and society should 
take upon itself to provide places of amusement of a kind that would 
elevate and not destroy. Society already has at its 'command, es- 
pecially in the cities, places that can be n;ade into social centers, 
and these places are its schoolhouses that have as yet only been 
half utilized. By proper effort recreation and amusement could be 
provided that would attract those who now make the saloon theiir 
social center. 

27. EXTRAVAGANCE OF THE RICH. It is a common, al- 
most universal, belief that the extravagance of the rich is a benefit 
to the poor. The thought of the average person on the matter runs 
as follows: If the rich keep a great many servants for menial work, 
which results in no concrete goods, there will be a greater demand 
for labor, because somebody must labor to produce the goods which 
society demands. If the rich spend lavishly in dress, keep half a 
dozen automobiles, take frequent and expensive trips abroad; all 



^ ELEMENTS OF ECONOMICS 47 

this creates a demand for labor, and thus increases wages. 

This reasoning looks sound upon a very superficial view. But it 
is fallacious. If the labor that is employed in supplying this super- 
abundance of luxuries for the rich were directed towards the pro- 
duction of things needed by the masses, there would be a double gain 
to the laborers. In the first place, things consumed by the masses 
would not be so high in price, because they would not be so seance. 
Some of the necessities being cheaper, more money would be spent 
to satisfy culture wants. This in the second place would lead to in- 
creased demand for labor, and wages would be higher. Let us look 
at it from another point of view. As it is now a large portion of the 
labor and capital of the country is directed towards the production 
of high priced luxuries of the rich. If a part of this labor and capital 
were directed towards supplying goods such as the masses need, the 
wants of the masses would be more fully supplied. 

The extravagance of the rich is harmful to society in another 
way, as pointed out above, since it sets a bad example which others 
strive to imitate. Thus it sets the middle and lower classes to strug- 
gling after material luxuries instead of intellectual culture that lies 
within the reach of all, if they would revise their estimate of the 
relative value of things. 



48 ELEMENTS OF ECONOMICS 

CHAPTER IV. 

The Factors of Production. 

28. PRODUCTION DEFINED. Production is the creation of 
utilities. It will be recalled that there are four kinds of utilities, ele- 
mentary utility, form utility, time utility, and place utility. Hence, 
production includes not merely the making of materials and finished 
products, but it also includes all transportation enterprises that give 
place utility as well as all mercantile business which also gives time 
and place utility. 

Mere speculators, however, who buy up goods in large quantities 
to hold them for an advance in price are not producers. They render 
no useful service to society. Just as much work must be devoted to 
the distribution of such goods to the consumer after these specula- 
tors have sold the goods to the regular dealers as before the specula- 
tors bought them up. All persons who gain a living by such means 
are mere parasites upon society. All those connected with stock ex- 
changes who are not performing the useful service of selling stocks 
and bonds to investors, but merely manipulating the stock market so 
as to enhance their values, are among these social parasites. 

29. THE THREE FACTORS OF PRODUCTION. There are 
three factors of production, man, nature, and capital. Nature in- 
cludes lands, minerals, and all physical and chemical forces. Capital 
includes all goods, made by man, that aid in production. The dis- 
tinction between capital and consumers' goods must be kept clearly 
in mind. Consumers' goods include all commodities that satisfy our 
wants and that are in shape for final consumption. Without capital, 
man would stir the ground with his hands, plant the seed with his 
hands, and tend it with his hands. He would catch fish from the 
streams and lakes with his hands and with his hands twist into' 
thread fibers of plants and weave them into garments. Needless to 
say, this direct method of production would be very inefficient. With 
tools and machinery, or by the indirect or roundabout method, man's- 



ELEMENTS OF ECONOMICS 49 

labor is more effective. It is indirect or roundabout because man first 
utakes his tools and machines and with these makes other tools and 
machines, and finally makes the commodities for final consumption. 
Thus capital is one of the greatest aids to civilization. Without 
capital man would forever remain a savage, for all his energies 
would be used up in supplying himself with necessities. 

A distinction should be made between private capital and social 
capital. Private capital is merely property from which a man de- 
rives an income; social capital enables man to produce more goods 
than he otherwise could produce. A dwelling house rented to a tenant 
is private capital; but it is not social capital. A dwelling house is to 
be classed as consumers' goods, just as much as food or clothing. 
And the fact that the houses are rented rather than occupied by 
those who own them does not increase the productive forces of 
society. 

Land may be classified as private capital, since all business men 
and farmers reckon their land as a part of their capital. But land is 
not to be classified as social capital, not merely because man did not 
make it, but for a much more important reason. That reason is that 
income from land is determined by a different law from that which 
governs income from capital. As a country becomes more thickly 
populated and capital becomes more abundant, the rate of interest 
declines; while under the circumstances stated, income from lands 
increases. Hence the science of economics, which tries to explain 
the phenomena of the business world, must disregard the practice of 
business men in this respect and put land and other natural agents 
in a class by themselves, in order to discover the law that governs 
the income from these natural agents. 

30. CLASSIFICATION OF CAPITAL. Capital may for con- 
venience be divided into four classes, considering the way in Which 
it aids in the productive process. These classes are, (1) the tools 
and machines we work with, (2) improvements in the soil, which 
help nature to do her work ! better and thus render our labor more 



50 ELEMENTS OF ECONOMICS 

effective, (3) materials we work upon, and (4) finished consumers' 
goods in the hands of producers and merchants. The first class in- 
cludes, besides tools and machines in a narrow sense, horses, fences, 
buildings, and many other things that make our work more effective 
than when the direct process of production is used. The second class 
includes fertilizers, drains, and other improvements that increase 
the productive powers of the soil. A close analysis shows that both 
the first and second classes of capital make our labor more effective 
for much the same reason, namely, they harness the forces of nature 
and make them work for us. The materials we work upon do not 
directly aid in production but are merely the passive instruments in 
the productive process. Finished consumers* goods in the hands of 
producers and dealers are classed as capital simply because they are 
in the last stage of the productive process, time and place utility 
being added to them in passing from the producer to the consumer. 
Both the third and fourth classes of capital are passive, and do not 
directly make our work more efficient, and the fourth is merely a re- 
sult of division of labor. 

Another classification of capital, based upon durability, is that 
of fixed and circulating capital. Fixed capital includes those forms 
of capital that are fixed or limited to one or at most to a few uses. 
A railway locomotive can be used only in transporting goods and 
people, and the roadbed and cars are also devoted to one use. A fac- 
tory building can be used economically for nothing but a factory, 
though it might be transformed from one kind of factory to another. 
Tools and machinery of all kinds are limited in the uses to which 
they may be put; but the degree of limitation varies widely. Axes, 
saws, hammers, and such tools, can be used in building all sorts of 
things, while a lathe in a machine factory has a much more limited 
use. The term, specialized capital, is often used instead of fixed 
capital and means practically the sam*e thing, that is, its use is lim- 
ited or specialized. 

Circulating capital is that which is used up in a single process, 



ELEMENTS OF ECONOMICS 51 

^s the coal in the furnace, the thread of which the cloth is made, the 
lumber which enters into all kinds of things. But a better term than 
•circulating is free, which indicates that the uses to which the capital 
may be put are many. The degree of freedom in use is however 
widely different for different things, as will readily be seen by a 
moment's reflection. It will be observed that fixed or specialized 
capital practically corresponds with the first two classes above, tools 
and improvements in the soil, and that circulating or free capital 
corresponds roughly with the materials we work upon. The fourth 
of the above classes, consumers' goods in the 'hands of producers 
and dealers, would seem to belong under specialized capital, since 
the use of such goods is quite limited. Clothing, for -example, can- 
not be used for any purpose but to wear. 

The latter classification of capital suggests facts of great in- 
dustrial importance. For example, if too much capital is invested in 
fixed or specialized forms of certain kinds it may lead to great in- 
dustrial disturbances. In 1837 the great crisis resulted from in- 
vesting too much capital in canals, turnpikes and railroads, and most 
of our other panics were due to similar causes. People borrowed 
money or credit largely of banks, in order to build the roads or canals, 
more were built than were then needed, the enterprises did not pay 
dividends, the banks that advancd the money and credit were ruined, 
and with their fall came the ruin of many other business houses, and 
so the mischief spread all over the country, carrying sorrow into 
hundreds of thousands of hom«s. 

31. THE INCREASE OF CAPITAL. The process of accumula- 
tion of capital involves three steps, saving from current income, in- 
vesting, which means, in reality, deciding what is to be produced, 
and the production of capital goods. Some writers use the word 
waiting in this connection, which calls attention to the fact that a 
certain interval must elapse between the time of saving and the 
final profits which result. Waiting, however, is not a step in the 
process, but only incidental to the process. Other writers use the 



52 ELEMENTS OF ECONOMICS 

term abstinence instead of waiting, the term abstinence calling at- 
tention to the self-denial and hardship involved in foregoing present 
consumption with the hope of having more for consumption in the 
future than one would have without the saving and waiting. Some 
writers, especially the Socialists, deny that there is any pain or hard- 
ship involved in saving and waiting, and they cite in proof of their 
contention the pleasure involved in anticipating the future increase 
of capital, and they also contend that the rich capitalists experience 
no hardship in the process. ' No doubt those who are thrifty and sav- 
ing take pleasure in providing for the future, and it is doubtless true 
that the rich do not have to deprive themselves of many luxuries in 
the process. But it is not true that all the saving is done by the rich. 
A very large portion of the savings comes out of the meager incomes 
of those who must forego many things they would like to have. The 
practical point involved in the dispute is that those who hold to the 
abstinence idea justify the payment of interest on capital on the 
ground that interest is a reward for the pain involved in saving and 
waiting. The Socialists claim that since no pain is involved, interest 
on capital is not justifiable. We shall return to this point in a sub- 
sequent chapter. 

The forces governing the rate of accumulation of capital are two, 
the productivity of industry and the habits of the people. If a coun- 
try is poor in natural resources and the people lack energy, little 
will be produced from which to save, even though the people are 
saving in their habits. And even if the people are both energetic 
and saving, capital cannot be accumulated rapidly if the country is 
poor in natural resources. But with rich natural resources and an in- 
dustrious and saving people, wealth and capital will accumulate 
rapidly. Again, nature may be favorable, and the people energetic, 
but if they spend it all in riotous living like the prodigal son, there 
will be little wealth and little capital. These three things, there- 
fore, the natural resources, the degree of energy of the people, and 
their habits as to saving are the main factors determining the rate 



ELEMENTS OF ECONOMICS 53 

■of increase of capital. 

Economists a generation ago usually laid it down as a law that 
the rate of accumulation of capital depends upon the rate of interest 
and that as the rate of interest declines the rate of accumulation of 
capital declines. But later economists have pointed out that the lat- 
ter part of the law is not necessarily true. The motive for saving is 
a more decisive factor than the rate of interest. If, for example, 
the motive be to save for old age, the person saving hoping to live 
from the interest of his capital, a lowering of the rate of interest 
would increase savings, because it would take a larger amount to 
keep one in old age. If, however, the savings are from the incomes 
of the rich, lowering the rate of interest would decrease the rate of 
saving, since the rich would continue to spend about the usual 
amount on pleasure and luxuries and less would be left for invest- 
ment. Hence, a variety of circumstances would determine whether 
or not lowering the rate of interest would increase or decrease the 
rate of saving. 

82. THE INCREASE OF LABOR— THE LAW OF MALTHUS. 
Land cannot be increased, hence we need not consider the increase of 
that factor. The increase of labor, however, is of vital concern. The 
increase of labor means the same as the increase of population, and 
the law of increase of population was worked out about a hundred 
years ago by an English economist by the name of Robert Malthus, 
and the law of population is known as the Malthusian Law. This 
law is that population has a natural tendency to increase faster than 
the food supply, unless checked by wars, disease, famine or what 
Malthus called moral restraint, by which he meant late marriages. 

The proof of this law is abundant. In this country in the colon- 
ial days population often increased so fast that it doubled every seven- 
teen or eighteen years, not counting immigration. During the last 
hundred and fifty years the population of this country has about 
doubled every twenty-five years. Germany, an old country, has 
doubled its population in the last forty years, under the stimulus 



54 ELEMENTS OF ECONOMICS 

of the great industrial development which she has undergone, and 
she has in the meantime sent millions of her people into other parts- 
of the world. Numerous examples might be given from various coun- 
tries to prove that where means of subsistence allows, population 
will double itself every twenty or twenty-five years at most. At the 
latter rate there would be in the United States, not including Alaska, 
in four hundred years from now twenty persons to every square rod 
of ground in the country, and in another century after that there 
would not be standing room. No proof is needed to show that the 
food supply would run short long before that time. In India and 
China the population has long been stationary because of a lack of 
means of subsistence, and starvation is one of the principle means in 
those countries that keeps the population from further increase. 

The law of Malthus does not imply that the population must be 
kept down by starvation. But it does mean that if wars, disease,. 
and famine do not keep the population within the limits of the food 
supply, starvation will be the force limiting further increase, at 
some future time, and that not very far distant, unless the great 
majority of young men delay marriage until their income is suf- 
ficient to enable them to bring up a family. Later marriages would 
result in smaller families, and thus the population would be checked 
and the standard of living could be maintained or even raised. A 
young man who enters the marriage relationship and has a large fam- 
ily pf children while he has nothing to support a family upon except 
his wages, arid while his wages are too low to support a large family 
piroperly, not only violates common sense, but he is an enemy of the 
race>'^since such a course pursued by all would inevitably endanger 
the welfare of the race. A high standard of civilization is njore im- 
portant than vast numbers. On the other hand, the rich who refuse 
to bear children that they may pursue their round of pleasures with- 
out the burden of rearing 'children, commit a sin against society, not 
only because they Irefuse to bear their share of the burdens of keep- 
ing up the race, but also because the rich are most able to give to 



ELEMENTS OF ECONOMICS 55 

their children the the highest standards of life. In all countries the 
lower classes, that is, those lowest in the scale of civilization, increase 
the fastest, which hinders the progress towards a higher civiliza- 
•tion; and wh-en those best able to propagate the race refuse to do so, 
they are helping the downward tendency of the race. Not that the 
race actually goes backward, necessarily, but when the l-ich refuse 
to help elevate it, they leave the work for the lower classes, which 
increases the difficulty of elevating the race through the various up- 
lifting agencies, the school, the church, the state, the club. 

33. OUR IMMIGRATION PROBLEM. The law of Malthus has 
important bearings upon our immigration problem, and it helps dis- 
pel several popular delusions regarding the effects of immigration. 
The prevailing notions among the masses of .the American people 
seem to be (1) that the great tide of immigration into this country 
during the last half century was needed to develop our resources; (2) 
that these foreigners have done the disagreeable work that Amer- 
cians would not do; (3) that our native workers, thus benevolently 
relieved of the disagreeable tasks, have been forced up into higher 
positions. 

Such, howeveJr, are not the facts of the case. Until the tide of 
immigration began to assume large proportions after 1830 there was 
no notable decrease in the rate of increase of our native population, 
the rate of increase being about 34 per cent per decade. But since 
1840, when the tide began to affect the American laboring men, the 
rate of increase of our native population has rapidly declined until 
it is about stationary in the older portions of the country. And taking 
the total population, immigrants included, the rate of increase has 
steadily declined since 1860 until it reached as low as 20 per cent for 
the last decade. It is quite evident, therefore, that the effect of im- 
migration has been to check the rate of increase of the native popula- 
tion and that the total population is probably little larger than it 
would have been had there been no immigration. Our polulation 
is rapidly becoming transformed from the old Teutonic stock to a 



56 ELEMENTS OF ECONOMICS 

mixture of races from southern Europe and western Asia. 

We can see this process at work all over the country. The cot- 
ton industry of New England furnishes a good example. Half a cen- 
tury ago the work in the cotton mills was done mostly by boys and 
girls from the farm. As the falrms became cleared and improved, 
and machinery was substituted for hand labor, the farmer no longer 
needed so many of his children at home to help, and the rise of the 
cotton factories afforded an outlet for surplus labor on the farms. 
When the French Canadians came into the mills, the native boys and 
girls, not liking the low wages or the society of the Canadians, 
would not work in the mills. Thus the outlet for the surplus labor on 
the farms being closed, the size of the family rapidly declined. 
Families of eight and ten children were common in earlier days in 
New England, where now families of more than two or three childr^en 
are rare. 

As to the notion that foreigners have done the disagreeable 
work that Americans would not have done, it may be said that if 
there is any work unfit for respectable Americans to do, it better be 
left undone, if conditions cannot be improved; for the main business 
of society is to produce respectable human beings rather than use 
them as mere tools for the production of wealth. But conditions 
surrounding disagreeable and dangerous work, such as mining, could 
be greatly improved, were we not so anxious to secure large divi- 
dends on capital. But even if conditions of such work could not be 
improved, there is no warrant for the ass-ertion that Americans 
would not do it. Higher wages doubtless would, have to be paid, 
and that is where the desire for immigrant labor originates. 

It is a very preval-ent notion that immigration forced the native 
Americans up into higher positions. Such a statement must mean 
either that a greater number of Americans are in high positions 
because of immigration or that a greater proportion of Americans 
are in high positions. If a greater number are in higher positions it 
implies either that some people other than Americans formerly filled 



ELEMENTS OF ECONOMICS 57 

these high positions or that more high positions were created by im- 
inig;ration for Americans to fill. The first inference is of course ab- 
surd, for none but Americans were here to fill the positions. The 
second inference is not true, since our industries would have developed 
as well with American labor as with foreign labor. All that the 
iStatement about forcing Americans up can mean, thesrefore, is that a 
larger percentage of Americans occupy high positions because of im- 
migration. This is perfectly true, but instead of Americans being 
forced into higher positions they have been forced out of the lower 
positions and in their struggle to maintain their standard of living, 
most Americans have smaller families. Thus, instead of immigration 
having conferred a blessing upon the country by relieving the Amer- 
icans of disagreeable work and giving them the higher positions, it 
has substituted foreigners for natives in the lowetr ranks of laborers. 

We would not necessarily conclude from this that immigration 
since 1830 has on the whole been a bad thing for the country. Each 
nation has some good points which other nations may lack. The light 
hearted, quick witted Irishman, the methodical, painstaking, economi- 
cal, substantial German, the emotional, music loving Italian, and the 
patient Slav, added to the energetic, resourceful, practical, extrava- 
gant American, and blended into one nationality, will make the 
Americans of the future the most resourceful, powerful, and versatile 
race in the world. This great fact should not, however, blind us to 
the necessity at the pTesent time of restricting somewhat and select- 
ing with more car^e the immigration now pouring in upon us, in order 
to prevent the threatened lowering of the standard of living of our 
working classes. 



58 ELEMENTS OF ECONOMICS 

CHAPTER V. 

Efficiency In Production. 

34. RICHNESS OF NATURAL RESOURCES. Efficiency in 
production depends upon the efficiency of each of the three factors 
of production and economy in their organization. The most important 
natural resource is the soil from which our food must be obtained. 
A nation with a rich soil and proper climatic conditions is blessed 
with the most indisp-ensable elements of wealth. Next in importance 
are mineral resources, the two most essential of which are iron and 
coal. Without these a nation must depend upon other peoples for 
the most of their tools and machinery. Copper is increasingly im- 
portant for various uses, but especially for the thousands of miles of 
teleg'raph and telephone wires that cover the earth. Zinc, tin, lead 
and other metals are needed, each having its special uses, and petrol- 
eum is now indisp'snsable. The precious metals are needed not only 
for money but in the arts. Timber is a most important resource, for 
firewood, for building purposes, for furniture, and for machinery of 
all sorts. Water power was a very important source of w.ealth in the 
infancy of the age of machinery, before steam largely displaced it. 
But water power has held its own in certain industries, notably in the 
textile industries. With the increasing use of electricity waterpower 
will assume a new importance, for it is as good as steam and much 
cheaper for generating electricity. Not the least important of a na- 
tion's resources are the natural facilities for transportation, includ- 
ing navigable rivers and lakes and opportunities for building canals. 

In all these natural resources the United States is richly bl-essed. 
The great Mississippi Valley is one of the largest tracts of rich land 
in the world, and we are just beginning to develop through irrigation 
and dry farming the vast regions of the West. The variety of soil 
and climate also makes possible the cultivation of a great variety of 
crops. The United States is rich in mineral resources. It is estimated 
that our available coal supply is about three trillions of tons, which 



ELEMENTS OF ECONOMICS 



is about a third more than the supply of all the remainder . of th< 
world, and in the annual production of coal this country leads all 
others. We produce about twice as much iron as Germany, more 
than three times as much as Great Britain, and five times as much as 
France or Spain. We produce more than half the copper supply of 
the world, nearly one-third the lead, about one-third the zinc, and 
two-thirds of the crude pertroleum. We did have abundance of tim- 
ber, but wasteful methods of lumbering and forest fires are rapidly 
exhausting that very necessary resource. Measures are being taken, 
however, to check the destruction and to reforest our depleted lands. 
With such an abundance of resources and splendid facilities for trans- 
portation, if properly developed, the United States is destined to be- 
come one of the richest nations in the world. 

35. EFFICIENCY OF CAPITAL. Efficiency of capital depends 
upon the nature of the instruments of production and the nature of 
the improvements of the soil. It is highly important that a nation 
keep abreast of the times in these matters. In the great interna- 
tional struggle for the world's markets, success depends largely upon 
the efficiency of the productive apparatus. Nothing but the latest 
and best machinery will enable a nation to compete on equal terms 
with wide-awake, progressive competitors. Not only must its ma- 
chinery be up-to-date, but also its methods of farming. 

In the invention and use of effective machinery the United States 
stands in the front rank of nations, and in the application of large 
machinery for doing work on a large scale, this country leads the 
world. Other nations equal us and probably excel us in the invention 
of machinery and processes of a more delicate nature, but for doing 
big things we stand without a rival. The causes of our success along 
these lines are various. The colonist, left largely to his own re- 
sources, developed ingenuity; and our liberal patent laws have greatly 
stimulated inventions, for a fortune awaits the successful inventor. 
The great size of the country and of the field of industry doubtless 
has had much to do with the direction inventions have taken in this 



^0 ELEMENTS OF ECONOMICS 

country, since the vastness of the industrial operations would invite 
inventions for doing big things. 

The United States has fallen behind the most progressive coun- 
tries of Europe, however, in the scientific cultivation and implrove- 
ment of the soil. The land has besn abundant, cheap, and of great 
natural fertility. Hence, it did not occur to our people that the 
soil needed any special care, and it begins to show signs of exhaustion. 
We have been doing extensive rather than intensive farming, partly 
hecause there has been mote profit in the former than in the latter 
method, and partly because it is characteristic of Americans to want 
to do things on a large scale. As a result, we have been "mining" 
our soil, as one writer has expressed it, rather than farming it. That 
is,we have been taking elements out of the soil and putting nothing 
back into it. In the South during the slavery days this was especially 
characteristic of their agriculture, and today the South has vast 
tracts of exhausted soil, awaiting recuperation through scientific 
farming. We shall return to this problem in the following chapter. 

36. EFFICIENCY OF LABOR. The efficiency of laborers de- 
pends upon their physical, mental and moral qualities. Physical 
ability depends upon inherited qualities and upon food, clothing, 
shelter and general environment, both during the time of the indi- 
vidual's growth and during the working period. If a people inherit 
from their ancestors strong, vigorous, healthy bodies, if their children 
are properly fed, clothed and car-ed for, so that nature is assisted and 
not hindered in its work of perpetuating the good qualities inherited, 
and if as laborelrs they have proper food, clothing, and shelter, and 
this means proper homes, that people will be efficient workers. An 
under fed, poorly clothed, badly housed nation is a nation of weak- 
lings, and it is impossible for it to attain a high degree of civiliza- 
tion. It behooves us, therefore, as a nation to look to our "slums" 
and those in poverty everywhere. From the point of view of mere 
production, looking at our laboring population as mere instruments 
oi production, to say nothing of the humanitarian considerations, it 



ELEMENTS OF ECONOMICS 61 

would be a wise economy to eradicate such slums and give every 
normal human being a chance in life; for if our laborers are ineffi- 
cient the whole nation is poorer. 

But physical strength, endurance, and vigor are of little avail 
unless directed by an intelligent mind. To native intelligence must 
be added both general and special training. We need general educa- 
tion to train all our powers in a general way, to make men and 
women capable of taking a broad view of life, to enable us to enjoy 
life, and to enable us to perform our part in the institutions of so- 
ciety, the home, the church, the state, the club; and then we need 
special education to fit us for the business side of life. The higher 
up the industrial scale we go, the more specialized is the knowledge 
and training required. It has generally been considered that rough, 
"unskilled" labor needed no special knowledge or guidance; but re- 
cent investigations prove that in doing many kinds of work, consid- 
ered unskilled, there is much opportunity for improvement. It has 
been demonstrated, for example, that by handling bars of pig iron 
in the proper way workmen can do two or three times as much work 
in a day as they ordinarily do, and be no more exhausted at night 
than they are by doing less in an ineffective way. When such an 
increase in efficiency is possible in such rough work it shows at once 
the possibilities of improvement in other lines. In preparation for 
many kinds of work scientific knowledge is needed. Science and in- 
dustry are closely associated in the modern world. Chemistry, 
physics, botany, biology, all the sciences of nature are involved in 
modern industry; hence scientific knowledge must be obtained for the 
workers higher up. For other kinds of work, such as carpentering, 
iron molding, and many others, some years of apprenticeship are 
necessary in order to learn the trade. Hence a nation should in some 
way provide opportunity for vocational training and education. 

Efficiency of labor depends, finally, upon the moral qualities of 
the people. Honesty, reliability, and willingness to do a fair day's 
work are as essential as mental and physical ability. If working 



62 ELEMENTS OF ECONOMICS 

men were perfectly honest, that is, willing to do a fair day's work, 
whether under the eye of the "boss" or not, much less superintend- 
ence would be needed and the cost of production would be much less. 
Wherever one sees small groups of men at work, even though there 
be but three or four, one man is set to watch the others to see that 
they do an honest day's work while he does nothing. All this is an 
extra burden upon the people which they must bear in the shape of 
higher prices. 

37. SOCIAL COOPERATION IN PRODUCTION. Let us now 
consider the organization of the factors of production. Organization 
of the factors of production includes at least five distinct phases, (1) 
social cooperation, (2) forms of busin-ess organization, (3) the size 
of the business unit, (4) the relative amount of the three factors 
used, and (5) organization of marketing. Social cooperation in- 
volves two varieties, division of occupation and division of labor with- 
in the occupation. Division of occupation occurs when some men 
become carpenters, others blacksmiths, others farmers, others cloth- 
makers, and so on through the long list. In division of labor there 
is cooperation, because each man is doing his special work in society 
and all are working towards one common end, the satisfaction of hu- 
man wants. Each satisfies his wants only to a small degree or not 
at all with the products of his own industry, but he sells most of his 
product, or all of it, and buys what he wants. Each man is dependent 
upon the rest of mankind for the satisfaction of most or all of his 
wants. 

Division of labor within the occupation or business is social co- 
operation, because each worker does only on-e small part of the pro- 
cess of making a certain thing or of rendering a given service, and 
all are doing their share in satisfying on-e want. The product is the 
result of the joint labor of all. We may place the workers in any 
business into two groups, those who are brain workers, and the labor- 
ers whom they direct. In a department store, for example, there is 
the general business manager, the department managers, the floor 



ELEMENTS OF ECONOMICS 63 

managers, cashiers, bookkeepers and salespeople, but only the last 
are actually doing the work of selling goods to customers, and they 
are working under the direction of those above them. In many lines 
of business subdivision of labor is carried to a very high degree of 
minuteness. In making shoes, for example, there are scores of dif- 
ferent operations, each worker having only one operation to perform. 
The exact number of these operations would vary with the type of 
shoe and the methods of manufacture, but in any case each worker 
has a very small part of the process of making a shoe. Several are 
cutting out the different parts of the shoe, each of the several seams 
are sewed on a different machine by a different worker, and several 
are finishing and polishing. In our great meat packing establish- 
ments division of labor is carried far. In removing the hides, for 
example, there are several men at work, each removing only a cer- 
tain portion of the hide. 

38. ADVANTAGES OF SOCIAL COOPERATION. Social co- 
operation has several advantages, three of which are especially im- 
portant, increase in skill, increase in inventions, and the opportunity 
of each to apply his special talents. Division of occupation leads to 
greater skill, because the frequent repetition of the same process, 
which results in an increase of product and an improvement in the 
quality. In the early ages of society everything man made was crude; 
but when a man gave his whole time to one thing, say making furni- 
ture, he would learn to work more rapidly and at the same time give 
grace and beauty to his product. With the more minute subdivision 
of labor, skill would be further increased because of more frequent 
repetition. In many cases, however, the improvement would be in 
quantity rather than quality, since no one person makes the article, 
and beauty would have to come from the imitation of a pattern or 
design of only a portion of the article, and the putting together might 
not be so artistically done as when one person makes the whole thing. 
Then, too, with the coming of the machine process, the sense of 
beauty of design would be cultivated only in the pattern makers. 



64 ELEMENTS OF ECONOMICS 

Division of occupation and division of labor lead to inventions be- 
cause, when a man's work is narrowed in its scope he can study more 
minutely the processes involved and new and better ways of doing 
the work can be studied, and new machines invented. Also, in this 
division of labor some will become men of science, and then inven- 
tions will multiply rapidly, since a knowledge of nature is essential 
to the inventor. This explains why through the long ages so few 
things were invented before the eighteenth century. Division of labor 
had advanced far long before that, but man's knowledge of nature 
was too limited to aid inventions beyond what had been blindly work- 
ed out centuries earlier. When men learned enough of the secrets of 
nature to see their application to machines, inventions multiplied, and 
the Age of Machinery began rather suddenly. 

A third advantage in social cooperation is that each person can 
do what he is best fitted for. Some can be great scholars and lead the 
world into higher realms of knowledge; some with great powers of 
organizing industry can bring capital, land and labor together and 
direct their efforts to larger results; each can turn to the industry he 
likes best, and those gifted chiefly with physical powers can do hard 
work, under the direction of superior minds. Thus all can cooperate 
in increasing man's material and also his higher welfare. All are 
working towards one great end, raising man to a higher plain of 
civilization. At this point the thought is borne in upon us that ail 
honest work, however rough, uninviting and humble, is contributing 
to man's welfare, and all workers are to be honored and respected; 
and, too, we cannot escape the conviction that thus far in the world's 
history our humbler workers, our brothers in the toil for all human- 
ity, have borne more than their share of the hard work of society 
and received too little of the higher comforts of life. 

39. DISADVANTAGES OF SOCIAL COOPERATION. Unfortu- 
nately there are several disadvantages resulting from cooperation. 
Division of occupation makes it possible for some lines of business to 
become overcrowded with capital and the less able men are driven 



ELEMENTS OF ECONOMICS 65 



to the wall by severe competition. Also the division of labor may re- 
sult in some trades becoming overcrowded, especially with skilled 
labor. Young men may prepare themselves for a certain trade and 
find that too many are in that trade. In that case they must be con- 
tent to do unskilled labor or else go to the expense of learning an- 
other trade. And evan the unskilled laborers may find it difficult to 
get work even at starvation wages; for with the division of labor and 
the machine process the mass of men must lose their industrial inde- 
pendence and become wage earners. Thus increased social efficiency 
is attended with the loss of industrial independence for the individual. 
The more specialized each man's work becomes the greater is the 
danger that some cannot get work, or only at a wage too low to keep 
soul and body together. In order to minimize these evils society should 
undertake the study of the needs and opportunities in the different 
lines of industry so that young nien with capital would have some 
general knowledge of the opportunities for investing capital in the 
different lines of business, and young men who wish to learn a trade 
would be able to choose with some knowledge not merely of their own 
aptitudes but of the needs and opportunities in the different trades. 
Vocational guidance needs to consider both the characteristics of the 
individual and conditions in the different industries. 

Another class of evils resulting from cooperation is the monotony 
of the work. This is especially true of minute sub-division of labor, 
where a person hour after hour, day after day, year after year, has to 
perform one simple operation, like, for example, cutting out soles of 
shoes or sewing on a machine run by steam power or electric power 
one short seam in shoes. Such monotonous work not only fails to de- 
velop mind and body as work of a varied and more complex character 
would do, but body and mind are actually weakened from lack of ex- 
ercise. It is this monotony that is especially injurious to young chil- 
dren whose minds and bodies have not yet fully matured. To coun- 
teract this deadening effect, society should provide proper oppor- 
tunities for amusement, exercise, recreation and study. Instead of 



66 ELEMENTS OF ECONOMICS 

having one great library in the city, inaccessible to most laborers be- 
cause too far away, there should be other smaller libraries and read- 
ing rooms within reach of all. These could well be at the school 
houses, which should be made social centers for recreation and enjoy- 
ment. 

Because of this minute division of labor and the machine pro- 
cess, are the two evils of child labor and of mothers working in 
factories when they should be at home caring for their children. 
The work is often so simple and easy that women and children can 
do it as well as men, and since they can be hired for lower wages, 
the children and the mother of the family are at work while the 
father is idle, either because of laziness or because he cannot get 
work. This is such a large problem that we postpone its dis- 
cussion. 

40. FORMS OF BUSINESS ORGANIZATION. A second group 
of forms of organization of the three factors may be called forms 
of business management. These forms are not concerned with the 
relations among the three factors so much as with the relations 
among those who manage the business. There are at least five 
forms of business organization, the single manager system, the part- 
nership, the corporation, cooperation in management on the part of 
workmen or producers, and ownership and management by the govern- 
ment. The corporation is so important that we reserve it for special 
treatment. In brief, a corporation is a company having a .charter 
making it a legal person, and with its capital divided into shares. 

The simplest form of organization is the single manager system, 
where one man owns and controls the business. The only coopera- 
tion in the management is that between the owner and his hired 
help, which is included in division of labor. But the one man is 
legally and industrially responsible for the success of the under- 
taking, and he alone gets the immediate benefit of such industrial 
conditions as make his profits large, and he alone is the one who 
suffers reverses, unless they are so severe as to make it impossible 



ELEMENTS OF ECONOMICS 67 

to keep his employees at work and pay them the accustomed wages. 

In the partnership there is real cooperation in the business man- 
agement, besides that between the managers and employees. The 
partners may cooperate in various ways. Sometimes one man furn- 
ishes great organizing ability and experience, with no capital or 
only a small amount, and another may furnish most of the capital, 
with little ability or experience. Again, the partners may unite 
their abilities in determining certain large questions of policy and 
each act as head of a special department of the business. The ad- 
vantages of the partnership form over the single manager system 
are (1) a large capital, which may be needed in certain kinds of 
business, (2) united wisdom in counsel, (3) greater interest in the 
success of the business as heads of departments than hired helpers 
would have. 

Cooperation in management, as the term is used by economists 
and business men, is really a form of partnership. A partnership 
is cooperation in business management, and the names of the two 
forms of organization do not indicate their differences. Cooperation, 
as used in this connection, does not in fact refer so much to the 
form of organization as to the character of the persons cooperating. 
Originally, cooperation meant the ownership of the business by the 
laborers themselves, who employ their own business managers. 
Later, farmers cooperated in establishing and managing creameries, 
grain elevators, and associations for marketing fruit or other 
products The form of organization might be the partnership or the 
corporation, or indeed any other form th*t might be devised. The 
purposes of these cooperative organizations are to secure the profits 
of middlemen and managers. In the 'case of laborers establishing co- 
operative retail stores the purpose is to get commodities cheaper, 
and the farmers desire to reap some of the profits that otherwise 
would go to middlemen. Such organizations may or may not be 
more efficient than the forms of business they displace. The signifi- 
cant thing about cooperation in this narrow sense is not increase 



ELEMENTS OF ECONOMICS 



in efficiency but the diversion of profits from one class of people 
to another. 

The fifth form of business organization is government owner- 
ship and management. In this case there is no special form of 
organization; the essential thing about it is that the managers are 
government officials. The government might appoint a single head 
to manage the business, it might manage it through a commission, 
which would approach the partnership form, or it might organize 
it after the pattern of a corporation, with stock owned by the 
public. Government ownership may or may not be more efficient than 
private ownership, owing to circumstances. The greater or l-ess 
efficiency would not depend upon the forms of organization, since 
these could be the same in private as in public ownership, but upon 
relative ability of public or private managers. The question of 
public or private ownership is not so much a question of efficiency 
as it is a question of distribution, that is, whether the profits of 
the business shall belong to a few managers or to the public. The 
three essentially different forms of business organization are there- 
fore the single manager, the partnership and the corporation. 

41. CORPORATIONS. There are at least five characteristics 
of corporations which must be clearly understood, for out of these 
characteristics come the advantages and the evils of this form of 
organization. As stated above, a corporation has a charter granted 
by the government, making the company a legal person, capabl-e of 
acting as a natural person in business affairs. It can conduct busi- 
ness, sue in the courts, inherit and bequeath property. 

Its charter gives the corporation continuous life. In soma 
cases the charter is given only for a term of years, usually twenty 
years or more, but in such cases the charter is usually renewed 
before the expiration of the time limit. More often there is no 
time limit to the charter. In case of the single manager system 
the business terminates with the death of the owner unless his heirs 
are d-esirous of continuing it. The partnership may have a more 



ELEMENTS OF ECONOMICS 69 

continuous life than that of the single manager system, but with 
the death of a member the business must be re-adjusted, and is 
therefore less permanent than the corporation. 

The capital of the corporation is divided into shares, usually 
of one hundred dollars each. This is often referred to as the joint- 
stock principle. When an investment is made in a corporation evi- 
dence of such investment consists of stocks or bonds, which are 
pieces of paper certifying the amount invested. Stockholders are 
the real owners, as they alone can take part in governing the busi- 
ness. Bondholders are creditors. From the business point of view, 
bonds are safer than stocks, since bondholders receive a stipulated 
rate of interest, and in case the interest is not paid they can take 
possession of the business. Stocks are often divided into common 
and preferred. The preferred stock is guaranteed a certain rate 
of interest, usually one or two percent higher than that paid on 
bonds; but the bondholders are more secure than preferred stock- 
holders, since in case of reverses interest on bonds must be paid 
before interest on preferred stock can be paid. The common stock 
is the least secure and the most speculative form of investment. 
If the business is prosperous, all earnings above what is necessary 
to pay interest on bonds and preferred stock go to the holders of 
common stock; and in times of adversity interest on common stock, 
that is dividends, may be very low or nothing at all. 

The corporation is managed by a small number of the owners. 
Usually about half the capital consists of bonds, and in a corpora- 
tion, therefore, those who virtually own one-half the property have 
no voice in the management. Another corporation could buy up 
one share over half the stock and control four times as much capital 
as it owned. Then a small number of men might own one share 
over half the stock of the second corporation and by controlling its 
action control eight times as much capital as they own. In extreme 
cases one man might own the controlling interest in the second 
corporation and ownership and management would be still more 



70 ELEMENTS OF ECONOMICS 

widely separated. Even when there is a large number who owrE 
the controlling interest in the business, the management is in the 
hands of a few, usually called the board of directors, elected by the 
stockholders. 

The fifth characteristic of business corporations is the prin- 
ciple of limited liability. In a partnership each partner is liable 
for the debts of the company, even though only a small fraction of 
his wealth may be invested in the business. In a corporation stock- 
holders are usually liable only to the amount of their investment. 
That is, if a man buys a hundred dollar share in a corporation he 
may loose it if the company fails, but creditors cannot take any of his; 
property not invested in the business. 

42. ADVANTAGES OF CORPORATIONS. Owing to these var- 
ious characteristics, corporations have several advantages over other 
forms of business organization. Continuous life enables it to look 
far into the future and pursue a continuous policy. The death or 
withdrawal of members need not interfere in the least with plans- 
looking many years ahead. A railroad corporation, for example, 
might lay its tracks and adjust its rates so as to develop the re- 
sources of a certain region, which might take twenty years or more. 
The region to develop might be uninhabited, and to induce settlers. 
to gather and develop the country would be a work of many years. 
The private individual or the partnership concern would seldom look 
so far ahead, and if it did the death of one of the leading members 
might upset the plans. Such a result might be brought about by 
the death of a leading man in a corporation; but it is not apt to do 
so, since the life of the corporation is continuous and its policy is 
determined by the will of a number of individuals, as a rule. 

A second advantage of the corporation is the large capital it is: 
enabled to gather from the ends of the earth. Continuous life, joint- 
stock, and limited liability make the corporation very attractive ta 
investors, both great and small. Investors usually desire to place 
their money in a business that is permanent. The joint-stock prin- 



ELEMENTS OF ECONOMICS 71 



ciple makes it a convenient form of investment. As one's income 
accrues from month to month or from year to year, savings can be 
invested as soon as they amount to one share of stock. Investors can 
take their choice of preferred or common stock or bonds. And the 
limited liability makes it safe for a man with other property to in- 
vest as much as he desires in the corporation, for he runs no rfsk 
of losing more than his investment. 

Stocks or bonds of a good corporation furnish a good investment 
for those who have not enough capital to enable them to go into busi- 
ness for themselves, or who for any reason do not wish to engage in 
business. Widows, orphans, workingmen, all find in the corpora- 
tion a suitable and convenient place for the investment of their small 
fortunes, or their small savings. 

A fourth advantage of the corporate form of business is, that it 
is more likely to undertake new lines of business than are other forms 
of organization. The joint-stock principle and limited liability make 
the corporation venturesome. New companies may be formed in which 
each investor risks but a small amount, and it may venture into un- 
tried fields without bringing any great disaster to the investors if 
it fails; and if it succeed, handsome dividends may be realized. Thus 
new fields of industry may be explored and the resources of a coun- 
try developed. 

A fifth advantage of the corporation is its ability to secure able 
managers. With a large number of members from which to choose 
officers, able men may be secured. And with the large capital it 
can employ men who may not be stockholders but who possess great 
executive ability, because it can afford to pay large salaries. 

Thus it will be seen that the corporation is the best known form 
of business organization for large undertakings. Modern business 
could hardly exist without the corporate form of organization. Large 
capital and continuous policy are most essential to many kinds of 
business. Railroads, the steel industry, and many others that might 



72 ELEMENTS OF ECONOMICS 

be enumerated, must have large capital, continuous life, and able 
management. 

43. EVILS OF CORPORATIONS. Unfortunately these advan- 
tages of corporations may result in serious evils to society. The cor- 
poration may become so large that it is a monoply, and all its ad- 
vantages as a superior instrument of production will be enjoyed only 
by the owners of the business, while the other members of the com- 
munity are injured by extortionate prices. 

Stock-watering is another evil which results from the division 
of the stock into shares, because these pieces of paper can so easily 
be multiplied and disposed of in such a way that the amount of the 
capital stock is much larger than the amount of money actually 
invested. There are several methods of stock-watering. A stock 
dividend may be declared, by which the amount of each person's stock 
is increased automatically. In the consolidation of several companies 
their values may be placed too high, and the stock of the consolidated 
company issued to the full amount of the false valuation. Another 
device is to accredit repairs to new construction in their system of 
bookkeeping and then issue new stock to cover it. Another way to 
over-issue stock is to sell it for only a fraction of its face value. 
Speculative promotors, for instance, in order to float stock of a new 
company, sometimes put into the concern about one-tenth as much 
money as the number of shares would indicate, then by judicious ad- 
vertising sell the stock to an unsuspecting public for full face value. 
Stock-watering is an evil because it may deceive investors and 
because it may deceive the government which may be attempting 
to regulate the earnings of the company or the prices it may 
charge. If the stock is half water and the government should allow 
a rate or price that would net the company six per cent on its capital 
stock, it would in reality be earning twelve per cent on the money 
actually invested. 

Speculative promotion is another evil characteristic of corpora- 
tions. A band of schemers get a charter, organize themselves into a 



ELEMENTS OF ECONOMICS 73 

company, appoint themselves the board of directors at handsome 
salaries, sell a lot of stock, make a show of establishing the busi- 
ness, but pocket most of the money by paying thems-elves big salaries 
and by other fraudulent means, and the investors receive little divi- 
dends. The federal government reports that the American people 
are thus cheated out of millions of dollars annually by bogus com- 
panies with get-rich-quick schemes. The joint-stock principle and 
the limited liability, which invite the public, and the opportunity 
for a small knot of individuals to manage the affairs of the company 
for their own benefit are responsible for the formation of companies 
m-erely for the purpose of selling worthless stock. 

A fourth evil, closely connected with the last, is the misman- 
agement by the few for their own benefit and to the injury of the 
mass of the stockholders. This may be done not only in starting 
bogus companies but in managing an old and profitable corporation. 
A small body^ of men who together own the controlling interest in 
the holding company may elect themselves officers of the company 
with salaries far beyond their earning power and thus reduce the 
dividends below what they ought to be. Also by manipulating the 
books, or by other means, they may increase their income at the -ex- 
pense of the small stockholders. 

A fifth evil and by no means the least which may result from 
the corporation is the industrial crisis. The venturesome spirit of 
the corporation is apt to lead into fields that turn out to be un- 
profitable. If this is done on a large scale by many large corpora- 
tions, an industrial crash is bound to follow. If the dividends are re- 
duced, banks and other corporations that may hold the stock of the 
failing companies suffer loss and may fail; and thus one company 
after another is pulled down, resulting in a "run" on the banks and 
a general collapse of credit and the cessation of many kinds of 
business. 

44. ECONOMY OF LARGE-SCALE PRODUCTION. The third 
phase of organization concerns the size of the business. Each indus- 



74 ELEMENTS OF ECONOMICS 

try or line of business has its peculiar characteristics which deter- 
mine the natural size of the business unit. In some kinds of business^ 
as the retail drug store or the retail grocery, the unit is naturally 
small, while in the steel and iron manufacturing business the unit is 
very large, and in the railway world the natural unit is much larger 
still. In each line of business there is a certain siz-e which repre- 
sents the maximum of efficiency. If the business is either larger 
or smaller than this maximum size it will be less efficient. This, 
means that the product of the larger or the smaller unit will be less 
in proportion to the amount of labor and capital expended. This is 
known, as the law of large-scale production or the law of economy in 
organization. The latter name is hardly appropriate, since there are 
several laws of economy in organization. Each phase of social co- 
operation involves a law of economy in organization. Division of oc- 
cupation or of labor is more economical or more efficient than letting 
each man supply all his own needs. Also in connection with the forms 
of business organization several laws of economy in organization may 
be stated. For example, the corporation is the best form of organiza- 
tion, that is the most efficient form, for large undertakings where 
the business should be permanent. When the law of economy in or- 
ganization concerns the size of the business, it is usually stated as 
follows: Increasing the size of the business increases its efficiency 
until the point of maximum efficiency is reached. This is correct. 
But a more complete statement of the law would be as follows: In 
each line of business there is a certain size which represents the 
maximum of efficiency. This statement of the law implies that if we 
start with a unit too small, efficiency increases with size up to the 
maximum, and after that point is reached efficiency decreases. 

This law is true for several reasons. If the grocery store is too 
small, for example, it is impossible to keep a sufficient variety of 
goods to suit all kinds of customers, and if it is too large much of the 
stock lies idle a long time, and it also is too expensive to deliver to 
such a wide circle of customers. In the manufacturing business, if 



ELEMENTS OF ECONOMICS 75 

the plant is too small it is impossible to make good us-e of all the 
machinery. Many expensive machines might have to be idle part of 
the time while the other machines are getting w^ork ready for these 
special machines or finishing up the work where these machines left 
it. In a factory for making hoisting elevators there are many differ- 
ent machines, each making a different part of the elevator. The fac- 
tory must be large enough to include all these different machines and 
enough of the different kinds to keep them all running constantly. 
This might require but one machine of some kinds that turn out their 
parts of the work rapidly while of other kinds of machines several 
of each might be required. This is called the economy in the use of 
fixed capital. A large concern can also employ the best technical 
experts or the ablest managers because it can afford to pay the high 
salaries to get such talent. Also the relative cost of fuel in a large 
plant would be less than in a small one. A fourth item is in the 
ability to make use of by-products. In a small concern it would not 
pay to establish factories for making into marketable products things 
that are merely by-products, hence these things are wasted, while in 
a large establishment it pays to make them into marketable products. 
A large meat packing establishment, for example, can utilize all parts 
of the animals. A fifth item to consider is the possibility of estab- 
lishing subsidiary industries. A large sugar refinery can make its 
own barrels, a large oil refinery can make its own cans, barrels, 
pumps and other supplies, and a great railroad may make its own en- 
gines and rails from iron from its own mines, transported on its own 
ore-roads, and make its own ties and the lumber for its cars from 
trees cut from its own forest lands. 

45. SOME RESULTS OF THIS LAW. From this law important 
results follow. One of the most important of these results is mo- 
nopoly. In case the unit of greatest efficiency is large enough to 
supply the market monopoly is inevitable. The largest concern has 
the advantage of its rivals and can undersell them and drive them 
out of business. This would be a good thing for the public if it were 



'76 ELEMENTS OF ECONOMICS 

the final result. But unfortunately it is not. When all rivals are 
disposed of the successful company raises its prices above the com- 
petitive level and thus reaps exorbitant profits. If a rival appears 
prices will be put down until the new com-er is crushed, and then 
prices go up again. In case the rival proves as strong as the old 
company, a period of savage competition will ensue until both com- 
panies, tired of making no profits at all or only very small profits, 
^11 voluntarily consolidate. 

The size of the market which one company may monopolize de- 
pends upon the nature of the business. In the ca^se of a street rail- 
way the unit of greatest efficiency is so large that one company 
can serve a whole city more cheaply than two or more companies can. 
In the steel manufacturing business the unit of greatest efficiency 
is large enough to supply a large portion of the country, the size of 
the region depending upon several circumstances, among them being 
cost of transportation. 

In most if not all lines of retail trade the unit of greatest effi- 
ciency is so small that it is reached before even the local market is 
supplied; hence, we find numerous groceries, shoe stores, drug stores, 
clothing stores, and other lines of retail business in small cities. In 
farming, the unit is so small that monopoly is impossible in produc- 
tion. It is possible, however, for farmers to unite and create a mo- 
nopoly in marketing certain products. Thus the fruit growers of the 
Pacific Coast seem to have formed a very effective monopoly in the 
marketing of citrous fruits. 

In some cases the tendency to monopoly is offs-et by smaller con- 
cerns uniting to do certain things while remaining separate in the 
main line. For example, several small companies might unite in es- 
tablishing subsidiary industries or in establishing plants to utilize 
by-products. And with the increasing use of water-power to gener- 
ate electricity one great electric plant, such as that at Keokuk, Iowa, 
can supply power to small companies, and thus make it cheaper than 
for the small concerns to generate their own power. 



ELEMENTS OF ECONOMICS IT 

A second important result of the law of large-scale production 
is that an increase in population, resulting in an increased demand 
for goods, might lower the price of goods. If establishments had not 
reached their maximum size, increased sales would enable them to 
produce more cheaply. 

46. RELATIVE AMOUNT OF THE THREE FACTORS:— LAW 
OF DIMINISHING RETURNS. A fourth phase of organization of 
the productive forces is concerned with the relative amount of the 
three factors used in the business. Not only must the business be of 
sufficient size to obtain the best results, but the factors must be used 
in certain proportions. This truth may be stated as a general law,. 
thus: In order to secure the best results, the three factors must be 
combined in certain proportions, the proper proportions depending 
upon the nature of the business and the qualities of the three factors. 
If the factors are combined in any other proportion, diminished re- 
turns is the result From this latter fact economists have generally 
called this the law of diminishing returns. In fact if any of the great 
principles of organization are violated, diminishing returns result. 
The law as stated above will cover every phase of the law. Under 
some circumstances we would have increasing returns, as when we 
start with the three factors out of proportion and then proceed to ad- 
just them properly. 

This law is true because of the very nature of the three factors. 
This can best be understood by taking several examples. Suppose a 
certain amount of labor and capital is invested in the cultivation of an 
acre of land and the yield is only ten bushels an acre, which is a very 
poor yield. This would show that too little labor and capital were in- 
vested, supposing the season to be favorable. Doubling the amount 
of labor and capital would more than double the crop, possibly pro- 
ducing thirty or forty bushels. But a point would be reached where 
an increase of labor and capital would not give an increased yield in 
proportion to the labor and capital expended. This is true because 
there is a limit to the capacity of the soil. Each growing plant needs 



78 ELEMENTS OF ECONOMICS 

a certain amount of moisture and sunlight, and crowding the plants 
will diminish their size, however fertile the soil, and labor spent in 
cultivation beyond a certain point is labor wasted. 

Land used for office buildings or factories obeys the same law, 
but for different reasons. A building two, three or four stories high 
may be much more economical than a building only one story high 
but spread over more ground. Even twenty or forty stories might be 
more economical than fewer stories. But as the height is increased 
certain items of cost increase that offset the advantages of a higher 
building, and a point is reached where it is more economical to build 
;another factory or office building rather than increase the height. 
Among the items of increasing cost would be for elevator service and 
the increasing cost of the walls of the lower portion of the building 
in order to make it strong enough to support the immense weight of 
the walls above. 

Again, suppose a factory has too few laborers to keep the machin- 
ery running in good order. Increasing the number of men will in- 
crease the output per laborer. But when there are enough laborers to 
keep every machine running in good order, a further increase of la- 
borers might increase the total output a little, but the output per la- 
borer would be diminished. This results from the nature of man and 
the nature of the tools and machines. Man's capacity for work is 
limited and if he tries to look after too much machinery he cannot do 
it well. Each machine requires so much attention, according to the 
nature of it, and if too few or too many laborers are set to work with 
it there is a waste of labor. 

47. SOME RESULTS OF THE LAW. The results of this law are 
of the utmost importance to society. It is because this great law is 
true that the great law of Malthus is tru-e. If the earth would yield 
in proportion to labor put upon it, and do so continuously, population 
would not increase faster than the food supply. Scientific agriculture 
may long offset the working of the law, and for a time -enable man to 



ELEMENTS OF ECONOMICS 79 

obtain more and more for a given outlay of capital and labor. But if 
the population of the world increases as fast as it has during the past 
hundred years, not many centuries hence the capacity of the soil of 
the whole world will be taxed to its utmost, and no scientific im- 
provements could possibly destroy the workings of the law of dimin- 
ishing returns. Hence, an increasing population may find it in- 
creasingly difficult to feed itself. But we do not need to look into the 
future to see the results of this law; for the increasing cost of agri- 
cultural products proves that the law is now at work, making it harder 
for the lower classes to get a living. 

The law of diminishing returns as applied to land used for office 
buildings or factories is of far less importance to society than the 
law as applied to agriculture. It might mean much to an individual 
manufacturer who finds it necessary to buy more land to increase the 
capacity of his factory. If he could simply keep on increasing the 
height it might be much cheaper. And since it would be cheaper, the 
public would also be able to get goods cheaper, if the manufacturer 
were not under the necessity of buying more land. But if the popula- 
tion of the United States should be doubled or quadrupled during the 
next century, it would not be difficult to get land enough to increase 
the factories in proportion to the increased demand for goods, for 
only a small fraction of the land would be needed for factories. But 
to increase the land used in agriculture would be quite a different 
thing. 

The law of diminishing returns as applied to labor also has grave 
consequences. This will be considered more fully when the subject of 
vv^ages is reached, hence we need only indicate briefly here the im- 
portance of this phase of the law. In case the laboring population is 
increasing faster than capital, that is, the tools and machinery with 
which laborers must work, the law of diminishing returns to labor 
will be brought into operation if there is an attempt to use all the 
labor supply, consequently, wages will fall. 

48. ORGANIZATION OF MARKETS. A fourth phase of organ- 



80 ELEMENTS OF ECONOMICS 



ization of industry relates to marketing products. The discussion of 
this phase of efficiency is quite recent. Investigation and experiment 
show that there is immense waste in present methods of getting 
goods from producers to consumers. Investigations show th^t farm- 
ers get about half the price, on many articles, that the consumer 
pays. One investigation conducted in the year 1915 shows that in a 
certain community the farmers ^received 18% cents a pound for but- 
ter, and the consumer paid 32 cents; potatoes cost the consumer $1.10 
a bushel and the farmer got 53 cents; eggs sold for 25 cents a dozen 
to the consum-er and the farmer got 11 cents; sweet corn in the ear 
sold for 40 cents a dozen to consumers and the farmer got 15 cents. 
When it costs more to market goods produced within a few mil-es of 
the consumers than it costs to produce them, it would seem to indi- 
cate that som-ething is radically wrong with the system of marketing. 
In the fail of 1915 fish was selling in the private markets of Wash- 
ington, D. C, at prices ranging about 192 per cent higher than in the 
Municipal market. On tbe whole, those engaged in the mercantile 
trades do not seem, according to these investigations, to be making 
extra high profits. The conclusion must be, therefore, that there is 
a great social waste somewhere. 

Among the possible causes for*this waste two are especially em- 
phasized. One is that there are often entirely too many middlemen. 
The jobbers and the wholesalers and retailers must have their profits, 
and sometimes it seems that no real social service is rendered, and 
hence, many goods might go direct from producer to consumer. This 
would apply especially to farm and garden products which are pro- 
duced near the place of consumption. Another cause of social waste 
is the system of delivery from retailer to the consumer. Goods are 
ordered in very small amounts, quick delivery is demanded, and sev- 
eral stores cover practically the same territory. The result is that 
half a dozen delivery wagons may be seen most any time covering 
about the same portion of the city, each carrying about a wheelbar- 
row load of goods; and the consumer pays the cost of this wasteful 



ELEMENTS OF ECONOMICS 81 



system. 

But it is much easier to find fault with the system than it is to 
find a remedy for these faults. In the mercantile world is about the 
only field, outside of farming, where competition yet prevails. For 
the last century or more the world has relied upon competition to pro- 
duce social and economic efficiency. The result seems a little dis- 
couraging. One of the oldest remedies is the cooperative store. In 
England this idea has been most fully developed. Cooperative retail 
stores are established in each community, these retail stores combine to 
establish wholesale stores, and the wholesale stores combine to es- 
tablish mills and factories and steamship lines. The result is that the 
majority of the workingmen in England and Scotland buy the major- 
ity of their goods at cooperative stores and save some of the profits 
that would go to the manufacturers, wholesalers and retailers, and 
get their goods about twenty or twenty-five per cent cheaper than the 
competitive price. Other countries in Europe are following the 
English example, and in the United States the idea is beginning to 
take root, especially in the Northwest among the Scandinavian popu- 
lation, who are familiar with it in their own country. A newer remedy 
suggested is the municipal market, which has been established in sev- 
eral cities. Possibly a combination of the tv^^o plans would be ad- 
vantageous, the municipal market for the garden produce and co- 
operative stores for more staple goods. 

The importance of bringing about a more economical method of 
marketing is coming to be recognized and various agencies are at 
work on the farm-to-consumer problem. Several states have organ- 
ized bureaus to look after this work, local post office authorities in 
some cities have entered the same field, and within the last few 
months, under the stimulus of the pancel post and the reduction of 
rates by the Interstate Commerce Commission, the large express 
companies have entered the field on a large scale. Buying clubs are 
organized in cities, marketing experts are sent out to instruct the 
farmers, and goods are carried direct from the farm to the consumer. 



82 ELEMENTS OF ECONOMICS 

CHAPTER VI. 

Problems of Production. 

49. INTRODUCTION. In our last chapter we were concerned 
mainly with the great principles that govern the efficiency of the 
productive forces of a nation. Incidentally, several applications of 
these principles were pointed out, showing their bearing upon human 
welfare. Many large practical problems of production were only 
hinted at or omitted for the sake of brevity in treating the theoreti- 
cal phases of the subject. In the present chapter we shall consider 
several of tbese great practical problems that face us as citizens and 
helpers in society. 

These problems of production are concerned largely with the 
conservation of our natural resources. Nature has bestowed upon us 
abundance of resources. Our forefathers, in America, being so few 
in numbers and facing a vast continent of apparently inexhaustable 
wealth, fell into careless habits in their use of the resources of the 
country without thought of future generations. As a result, our re- 
sources begin to show signs of exhaustion while our nation is yet 
young. Within the last twenty years there has been an awakening to 
the fact that this usel-ess waste must be stopped, that our soil, our 
forests, and the elemental resources of our country may be trans- 
mitted unimpaired to future generations, and thus preserve the foun- 
dation of our future greatness, material and intellectual. 

50. FOREST PRESERVATION. The most notable example of 
thoughtless waste is the destruction of our forests. When America 
was first settled, the eastern half of the country was one vast wilder- 
ness. Most of this was burned to get it out of the way. And still 
the destruction continues, but from different causes. It was -estimated 
a few years ago that our forests would be gone in thirty yeairs, unless 
the useless waste were checked. The two great caus-es of the de- 
struction of our forests are wasteful methods of lumbering and forest 
fires. Great tracts of forest lands are bought by the lumbering com- 



ELEMENTS OF ECONOMICS 83 

panies who have no interest in preserving the young trees for a 
future generation. As a result, everything is cut that is worth cut- 
ting, big and little, and the underbrush left scattered over the 
ground. Fires get started in the brush when dry and the young 
trees are destroyed. Fires also break out in forests not yet cut and 
immense tracts are burned over. Instead of replanting these lands 
with trees, the companies sell them cheap to individuals who culti- 
vate them. In, many if not in most cases the landl is better ada«pted 
to timber growing than to farming, but few wish to wait for a forest 
to grow before realizing on their investment. 

The evils resulting from this destruction of our forests are many 
and serious. Lumber is getting scarce and high in price. On the hill 
sides, the soil is washed away and lodged in the rivers, where it in- 
terferes with navigation. With the destruction of the forests around 
the head waters of our rivers, in the Rocky Mountains and in the 
Appalachians, and in the northern pine forest states, the snow melts 
early in the spring and the waters rush down into the valleys, causing 
destructive floods. And the rains of early spring also rush down the 
liill sides causing floods, because the leaves, roots and loose soil no 
longer take up the moisture and allow it to work its way gradually 
down into the valleys, thus steadying the flow of streams. When the 
forests are destroyed, rivers are at times swollen torrents and at 
times nearly dry. The fourfold result is hindrance to navigation, a 
destruction of life and property in floods, the conversion of fertile 
land into swamps, and the loss of water power, for there must be a 
steady flow of water to afford continuous water power. Indirectly, 
the work of irrigation is made more difficult, since it requires more 
work to hold the water back by dams when it all comes down at once. 
Thus a whole group of problems is bound up together, forest restora- 
tion and preservation being a main element in the solution of all of 
them. 

The people of this country are beginning to realize the necessity 
of preserving our forests yet remaining and of restoring them on 



84 ELEMENTS OF ECONOMICS 

lands better adapted to raising trees than otber things. Most of the- 
states are showing an active interest in increasing forest areas, and 
in over thirty states laws have been passed to encourage tree plant- 
ing. Reforested lands are sometimes exempt from taxation for fifty 
years, and elaborate systems are devised for the prevention of for- 
est fires. Fourteen states are actively cooperating with the federal 
government in preserving the forests at the head waters of navi- 
gable streams. Even private owners of forests are awakening to the 
need of preserving forests, and in Montana, Idaho, Oregon and Wash- 
ington alone over 20,000,000 acres of private forest lands are patroll- 
ed to protect them from fires. The federal government is doing 
much to restore forests on lands suitable for timber, and its efforts 
are especially directed towards the reforesting of the lands around 
the head waters of navigabl-e rivers. In the Rockj? Mountains and the 
Far V/est region are several forest reserves. These forests are care- 
fully guarded from fires and the cutting of the trees is under the 
supervision of government officials. Forest reserves are also being 
established in the White and Appalachian Mountains, about 1,000,000 
acres having been purchased under the Wseks Act. This vigorous 
and united activity of lumber companies, the states and the federal 
government ought soon to check the further destruction of our forests 
and in course of time reestablish them on a firm and enduring basis. 
The total area now included in National Forest Reserves amounts to 
over 186,000,000 acres. 

51. FLOODS. Another serious problem is the prevention of the 
annual floods which inundate large tracts of lowlands. Hundreds of 
lives are lost annually and it is estimated that the damage to property 
amounts to about $50,000,000 yearly. Cities are inundated, cellars 
are filled with water, buildings are damaged or destroyed, bridges 
and railway embankments are swept away, live stock on the farms is 
destroyed, and the lowest lands are so late in drying out that the 
crop yield is considerably lessened. 

Both the Atlantic and the Pacific slopes experience these floods, 



ELEMENTS OF ECONOMICS 85 

but the Mississippi Valley suffers most. The wide-spreading branches 
of the Father of Waters gather the water from the snow and rain of 
half a continent and annual high water is inevitable. But when the 
snows of winter are heavy and spring rains come in great sheets, as 
they did over Ohio and Indiana in 1913, great floods result. 

From the nature of the causes of these floods it would seem im- 
possible to prevent them entirely, and all that can be done is to de- 
crease the height of the tide. Reforestation of the watersheds and 
building of great reservoirs would hold back the waters, thus lessen- 
ing the height of the flood; and channel deepening would enable the 
rivers to carry a larger volume of water. But all these remedies com- 
bined would probably not be adequate. Congress has made feeble 
attempt to build levees along the lower Mississippi, which help a 
little; but they are not high enough nor strong enough to hold the 
greatest floods. And practically nothing has been done on the Upper 
Mississippi or its branches. The problem is still unsolved. Some 
have suggested a system of dykes on the Upper Mississippi and its 
branches and a great spillway from Cairo, Illinois, to the Gulf. It is 
suggested that this spillway be ten miles wide or more, with dykes 
high enough to hold the waters of the greatest possible flood, and 
with cross dykes or dams every two or three hundred miles. At these 
dams electric plants could be established, the imprisoned water in the 
spillway furnishing the water power, and electric power could be 
supplied to the whole region of the lower Mississippi for lighting, 
transportation and manufacturing. But whatever is done, some uni- 
form plan under the control of the federal government is necessary. 
Wherever local communities have undertaken the solution of the 
problem space between embankments have been made too narrow in 
order to gain valuable land, and as a result the height of the floods 
have been increased above the points where the channel has been 
narrowed. 

52. WATERWAYS. The United States has a splendid oppor- 
tunity for internal waterways. With 25,000 miles of rivers and lakes 



86 



ELEMENTS OF ECONOMICS 



that could be made navigable, and with lands suitable for digging" 
canals to connect the river systems, this country could easily take 
front rank among the nations in the efficiency of its internal v^ater- 
ways. But as yet we have no general system of internal water 
transportation. Transportation by water costs about one-third as 
much as transportation by rail, including original cost and the up- 
keep. We are just beginning to realize our opportuninties and vast 
systems of waterways are being discussed and beginnings have been 
made. 

An ideal system of inland waterways would include (1) Lakes- 
to-the-Gulf waterway from Chicago to New Orleans, (2) improve- 
ment of the main branches of the Mississippi so as to connect with 
the main trunk from Chicago to New Orleans, (3) canals connecting 
the Ohio with the Great Lakes, (4) the improvement of the Erie Canal 
route, (5) an inland waterway parallel with the coast from Boston 
to the Mexican border, cutting across the peninsula of Florida, (6) 
the improvement of the Columbia River, and (7) the Panama CanaL 
Such a system would make seaports of Chicago, St. Louis, Min- 
neapolis and St. Paul, Duluth, Cincinnatti, Buffalo, and other inland 
cities. The special advantages of the inland waterway along the 
Gulf and Atlantic Coasts would be the avoidance of the dangers from 
the stormy sea and the immense shortening of the distance between 
the different cities along the coast. The Panama Canal will give 
cheaper transportation between the Atlantic and the Pacific coasts, 
between North and South America, and bring the United States into 
closer communication with all other continents. 

Why have we neglected our opportunity? For several reasons - 
The rapid development of railways before the waterways were de- 
veloped checked the latter movement. It costs less to build railroads 
than to build canals and canalize rivers, and the country took the 
line of least resistance. In recent years the railroads have opposed 
the development of a system of waterways, but to what extent this 
influence has retarded the progress of waterways cannot be definitely 



ELEMENTS OF ECONOMICS 87 



known. Th-e wasteful and unbusinesslike financial methods of Con- 
gress has stood in the way. From the beginning of the present gov- 
ernment of the United States up to the end of the fiscal year 1913 
Congress has appropriated the sum of $746,927,946.61 for the im- 
provement of rivers and harbors. If half that amount had baen 
spent in the proper way the country would have had a fairly good 
system of waterways. Instead of selecting a few great projects and 
putting them through so that the country might get the benefit of 
their use, Congress has acted upon the principle that each Congres- 
sional district must receive some of Uncle Sam's money. Innumer- 
able little projects all over the country have been undertaken and 
millions of dollars have been spent in dredging harbors and improv- 
ing rivers where there is little or no commerce, and the only tangible 
result of a large part of this expenditure has been to furnish jobs to 
the political friends of Congressmen. And the same "pork-barrel" 
methods of appropriation have been followed in selecting and carry- 
ing forward the really important projects. Under the pressure of 
public condemnation and the vigorous protests of our presidents since 
the Civil War, Congress is now going about its large projects with 
more businesslike wisdom than in previous years. Instead of spread- 
ing out its efforts all over the Mississippi River work is now concen- 
trated on certain portions so as to get them finished. 

Portions of the ideal plan sketched above have been completed 
and most of the other portions are under way. The Panama Canal 
is now completed. The canalization of the Columbia from its mouth 
to Lewiston, Idaho, is under way. The great New York State Barge 
Canal is about two-thirds finished. The Mohawk River is to be 
canalized to a point near Rom-e, from there the string of lakes and 
rivers is utilized until the old canal is reached in the western part 
of the state, and thft remainder of the course is along the old route. 
The new canal will be able to accommodate barges of 3,000 tons 
capacity and it m^kes possible twenty-five times as much traffic 
as the old canal could handle. The Ohio River is to be made navi- 



88 ELEMENTS OF ECONOMICS 

gable for small boats by the construction of 54 dams and locks be- 
tween Pittsburg and Cairo, and 11 dams and locks are now com- 
pleted. The improvement of the channel of the Mississippi from 
Minneapolis to the Gulf is under way, dams, dredging, and levees 
being the means employed. The inland waterway along the Atlantic 
and Gulf Coasts is well under way, several links in the chain having 
been completed. The Cape Cod Canal from Cape Cod Bay to Buz- 
zard's Bay is finished and will shorten the distance between New 
York and Boston about 70 miles. The Chesapeake and Albemarle 
Canal from Norfolk, Va., to Beaufort, N. C, is being constructed 
by the federal government. A €hain of waterways is being con- 
structed the entire length of the Gulf Coast, excepting along the 
Florida peninsula. Thus it seems that at last the United States is 
to have a system of inland waterways commensurate with its needs. 

53. GOOD ROADS. The three main means of transportation 
are railroads, wateirways and roads. Railroads have been well de- 
veloped by private companies, and the great railway problem is 
how to control them for the public interest. Our waterways problem 
is on the road to solution. But the problem of good roads is yet 
confronting us, though some progress is being made. With all our 
nervous energy in getting rich we have neglected one of the most 
'essential sources of wealth, good roads, and the United States has 
poorer roads than any of the great nations of western Europe. 

The causes of this backward condition are various. The nation 
is yet young and we have been spreading rapidly westward over wild 
territory. Under such conditions road building must of necessity wait 
for the country to develop to some extent. To build anything but 
dirt roads is costly, and a new country may have plenty of natural 
resources, but it takes time to accumulate wealth. Another reason 
for not building good roads is the lack of material in most parts 
of the country, and paving material must be shipped long distances. 
A third great cause for the poor condition of our roads is that until 
recently road building and maintenance has been under the -exclusive 



ELEMENTS OF ECONOMICS 89 

control of local governments, the township or the county. We might 
have had at least good dirt roads, if there had been proper coopera- 
tion among the different governments, national, state, and local. But 
farmers are usually busy and the roads have always been much 
neglected. If one district neglects its roads, there is not much use 
for the other adjoining districts to build good roads. Hence, there 
has been a tendency for the roads to sink to the level of the poorest. 
To get a good system of roads all concerned must pull together. 
Som-e roads should be great national highways leading from one end 
of the country to the other; others should branch out from these 
and connect the main cities and social centers; local roads serve as 
the feeders. It is plain, therefore, that all grades of government, 
national, state, county or township, should cooperate. The main roads 
cost more than the local roads, and the burden must be born not 
by the local community but by the nation and the states. 

The advantages of good roads are many and well recognized. 
The most obvious advantage is the cheapening of the cost of trans- 
portation. It is estimated that the cost of getting goods from the 
farm to the railroads in the United States is greater than the cost of 
railroad transportation. Easier means of communication and trans- 
portation enable the country people to get together more and thus 
reduce the loneliness of rural life; the movement for consolidation of 
rural schools would be aided, since one of the main obstacles to con- 
solidation is the difficulty of getting the children to and from school 
every day. The "Stay on the farm" and the "Back to the farm" move- 
ments would be helped along, since country life would be nlore profit- 
able and more attractive with good roads to facilitate transportation 
for economic, social, educational, and religious purposes. 

It is encouraging to observe the nation-wide awakening to the 
need of good roads. The automobile, rural mail delivery, and agi- 
tation by the wide-awake portion of the community have at last 
moved the masses. "Good roads" days are set aside for public ob- 
servance by working the roads, commissions of inquiry are being ap- 



90 ELEMENTS OF ECONOMICS 

pointed to make a scientific study of the whole problem, in its finan- 
cial, political and engineering phases, and state laws are being enacted 
giving the state governments a larger voice in road affairs. The 
federal government has built several small bits of road in different 
parts of the country to serve as examples, and certain principles of 
roadmaking have been worked out. It has been demonstrated, for 
example, that it is better to have a long, level road around a hill than 
a short, steep graded road over a hill. It has been demonstrated also 
that in most cases, for a country road, a dirt road is hard enough if 
it is kept dry; hence if anything but a dirt road is to be built the mairt 
thii>g is to make a waterproof covering or "roof." The very best and 
most expensive material may be used to little purpose if it is not 
waterproof; for if water gets through to the dirt foundation the dirt 
becom-es soft and the paving becomes uneven or broken and is worse 
than a poor dirt road. The general principles of the new state-road 
laws are the establishment of state road commissions to cooperate 
with county officials in building certain roads, the sharing of the 
burden of the work jointly by state and county, and the general su- 
pervision of the work of construction by state officials. Several bills 
have been introduced into Congr-ess authorizing national aid in road 
making; but the feeling that such matters belong to the states, and 
that the "pork-barrel" spirit would defeat the main purpose of na- 
tional aid have thus far prevented the national government from 
doing anything in this direction. 

54. IRRIGATION. Another great problem of production is the 
utilization of large tracts of our arid lands. With a few local ex- 
ceptions, the whole region west of the hundredth meridian is arid 
and for most crops ne-eds irrigation. This region comprises about 
half the area of the country. But owing to the limited amount of 
moisture from rain and snow only a small fraction of this vast region 
can be irrigated. Some can be irrigated from artesian wells, but 
how much is not definitely known. It is estimated that about 150,- 
000,000 acres or 235,000 square miles can be irrigated from stresims. 



ELEMENTS OF ECONOMICS 91 

The irrigated lands are very fertile and 40 acres makes a good sized 
farm, hence, there will be room for 4,000,000 farms, or about 20,000,- 
000 people, not including those in villages and cities which will grow 
up. Though only a small proportion of our arid lands can be irrigated, 
the amount is by no means small, being larger than either France or 
Germany. In 1910 about 20,000,000 acres were ready for irrigation 
from streams. About 40 per cent of this was irrigated by private- 
individuals, 16 per cent by irrigation companies, 32 per cent by co- 
operation among the landowners, 6 per cent by state governments 
and 6 per cent by the federal government. 

The irrigation of our arid lands is a national problem, and its 
general solution should have been under the control of the federal 
government. Private individuals cannot afford to construct reser- 
voirs and ditches on a large scale, and cooperation on a large scale 
cannot be undertaken until the country is fairly well settled. More- 
over, if left to private enterprise wasteful methods are employed and 
the amount of land that can be irrigated is much smaller than it 
would be if the water were used economically. Litigation also results, 
for late settlers go higher up the streams and divert the water, in 
wasteful fashion, upon the lands above, leaving an insufficient amount 
for those who have been using the water. If corporations get control 
of the water rights a monopoly is created, and extortionate rates for 
water are charged. Even states cannot properly control the matter, 
since most of the main streams that furnish the water run through 
more than one state, and litigation among the states results. If all 
these difficulties had been foreseen provision might have been made 
for supervision by the federal government before it disposed of its 
lands. In 1902 the federal government entered the field. A law was 
passed setting aside the proceeds of the sale of public lands to be used 
in constructing irrigation works. Thus a continuous fund for irriga- 
tion is created and maintained. When irrigated lands are sold the 
proceeds go into the fund for irrigating more lands. 

The government is pursuing a liberal policy that will make of 



92 ELEMENTS OF ECONOMICS 

the irrigated regions a land of small farms. The land is sold only to 
actual settlers, in tracts ranging from 10 to 160 acres, according to 
the value of the land and what it is suited for, at a nominal sum of 
from 50 cents to $1.50 an acre and whatever it costs to irrigate it. 
This includes perpetual water rights. The average cost thus far is 
about $16.00 per acre for constructing reservoirs and ditches and 
$1.07 for maintenance. The cost of the government projects, however, 
is much greater than that, being about $68.00 an acre, because lands 
easiest to irrigate were the first to be taken by private individuals, 
aiid because of the more permanent character of the public irrigation 
works. The average value of the crop on the irrigated lands in 1910 
was $25.00 an acre, which shows that money spent in reclaiming our 
arid lands is well invested. 

Irrigation and "dry farming" are converting the land of the cow- 
boy, the buffalo, and the miner into a rich agricultural country with 
some advantages other agricultural sections cannot enjoy. The ridh- 
ness of the land and the assured water supply make it possible for a 
small tract of land to support a family in good condition. The density 
of the population enables it to secure many of the advantages of city 
life, without its nervous strain, filth, and overcrowding. School sys- 
tems may be established rivaling those of the cities; roads can be 
well paved and the dam near by will furnish power for electric light 
and transportation. On the whole, the industrial, political, and intel- 
lectual life of the Far West will be transformed and it will become 
one of the most intelligent and progressive portions of the country. 

55. SWAMP LANDS. Another great source of national wealth 
lies in our swamp lands. We have done much less to utilize this 
source of wealth than has been done in the arid regions. Most of the 
land has passed into private hands, hence there has not been the op- 
portunity for the government to take the initiative, drain the lands, 
and sell them. For private individuals to do anything worth while, 
cooperation among the owners is necessary. This is being done to 
some extent, but to reclaim the main part of the swamp lands action 



ELEMENTS OF ECONOMICS 93 

by the state and in some cases by the nation is necessary. Not only 
must great ditches be dug but the annual floods which inundate the 
lowlands must be prevented. 

There are in the United States about 75,000,000 acres of swamp 
lands that could be drained. The most of this land lies along the 
Missippi River, around the Great Lakes, in Florida, and in the States 
on the Pacific Coast. The land is extremely fertile and would support 
a farming population of at least 10,000,000. It costs form S6 to $9 
an acre to drain the land and the value of the crop would be at least 
$50.00 an acre. Hence the cost is about half that for irrigation and 
the value of the crop is about twice as great as that of irrigated 
lands. Evidently money spent in swamp drainage would be a good 
investment. In addition to the great increase of our food supply, 
drainage of our swamps would increase the healthfulness of these 
regions and of the country around them. Several states have within 
the last few years passed laws on the subject of swamp drainage and 
appointed commissions to take charge of the drair.age works. 

56. SCIENTIFIC FARMING. One of the most important prob- 
lems of the day is how to improve our methods in agriculture. There 
is much need of such a study, for our soil is rapidly becoming ex- 
hausted by unscientific methods of cultivation. Abundant proof of 
this exhaustion is found in the large amount of land formerly under 
cultivation that is now abandoned. Any traveller in the older sec- 
tions of the country can find in any community many abandoned 
farms. According to the census reports the amount of unimproved 
land in New England and New York increased from 14,000,000 acres 
in 1880 to 19,000,000 acres in 1900. In those seven states about 30,- 
000,000 acres were under cultivation in 1880 and only 23,000,000 
acres in 1900, which shows a loss of about 23 per cent in twenty years. 

Some writers have attempted to show recently that our soil i& 
not being exhausted, because, they claim, there has been a slight in- 
crease in the yield per acre of most crops in the United States during 
the past ten or fifteen years. But the rise in prices during those 



-94: ELEMENTS OF ECONOMICS 

years would naturally lead to more intensive cultivation, and in that 
case an increased yield per acre would not prove that more intelligent 
methods were used or that the soil is not being slowly exhausted. In 
the second place, there has been no increase in the yield per acre of 
the great staple crops during the last half century. The average 
yield of wheat during the ten year period, 1866-75, was 11.9 bushels 
per acre, and for the ten year period, 1901-1910, 13.9 bushels per acre. 
The average yield of oats for the two periods was 28.1 bushels and 
29.7 bushels respectively; of rye, 13.6 bushels and 16.1 bushels; of 
harley, 23.1 and 26 bushels respectively. These four crops show an 
increase of from one and one-half to three bushels per acre, a very 
small increase when one considers the great improvements in farm 
machinery. On the other hand, the yield of corn, whose acreage is 
nearly twice that of the other four crops combined, declined about 
two bushels per acre, being 28 bushels per acre for the first perijod 
and 25.9 bushels for the second. The net result seems to be that there 
has been no general increase or decrease in the yield per acre during 
the last half century, in spite of th-e improvements in farm machinery 
and the stimulus of rising prices during the last fifteen years, which 
would naturally lead to more intensive cultivation. 

There are at least four great causes of the exhaustion of our 
soil. (1) The abundance and cheapness of the land led to extensive 
rather than intensive cultivation. (2) Increasing amount of tenant- 
farming. A tenant naturally has little interest in maintaining intact 
the producive powers of the soil. His purpose is to get as much out of 
it as possible during the short time he has possession of it. Conse- 
quently, the soil is "mined" rather than cultivated. (3) During 
slavery days the soil of the South became exhausted because of the 
wasteful methods pursued. But one or two great crops were culti- 
vated, no rotation of crops was possible, no fertilizers were used, and 
when one piece of land became exhausted it was abandoned and an- 
other piece taken under cultivation. (4) The individual farmer does 
mot lose very much by the slight exhaustion of the soil, when it is 



ELEMENTS OF ECONOMICS 95 

widespread, because the rise in the prices of tha products will make 
up for shortage in the yield. Henc^e, the non-agricultural portion of 
the community bears the chief burden of the exhaustion of the soil, 
and the farmers are willing to pursue their easy-going ways and their 
unscientific methods. 

The general results of this -exhaustion of the soil are the rise in 
prices and the decline in the relative importance of the United States 
^s a source of the world's food supply. The rise in prices has been 
produced by other causes also, especially the increase in the supply 
of gold and the increase in population, which makes it necessary to 
bring into cultivation lands more distant from the main markets. But 
investigators are pretty well agreed that the exhaustion of our soil 
is playing an important part in the rise of price of agricultural 
products. The second result is shown by our imports and exports of 
food stuffs. In 1900 the Unit-ed States exported $545,473,000 worth 
of food stuffs and imported $230,916,000 worth; in 1913 the exports 
amounted to $502,094,000 and imports, $406,000,000. In other words, 
our exports of food stuffs actually decreased while our imports 
nearly doubled. Formerly we wer-e one of the world's chief sources 
of supply for bread stuffs and meat; but during the last few years 
we have begun to import meat. The rapid increase in our population 
is to a large extent responsible for this sudden change in our economic 
position in the world's markets, because the increase in population 
has been chiefly urban. But with our naturally fertile soil this coun- 
try could easily support a population several times as large as ours, 
with proper methods of cultivation, and the shortage in food supply 
that threatens us in the near future is unnecessary. It is this situa- 
tion that is greatly stimulating the movements for more scientific 
agriculture. 

57. GOVERNMENT AGENCIES FOR STUDYING AGRICULT- 
URE. The farmers have done much of their own initiative in intro- 
ducing more scientific agriculture, but the national and state gov- 
ernments, viewing the subject from the standpoint of national pros- 



96 ELEMENTS OF ECONOMICS 

perity for all classes, have undertaken the task of studying agriculture 
and of disseminating the knowledge among the farmers, in the hope 
that self-interest will prompt them to apply the knowledge gained. 
This work affords a good -example of social cooperation; for the in- 
dividual farmer could not possibly do what the national and state 
governments are doing for him. 

The main governmental agencies for studying agriculture and 
disseminating the knowledge are (1) the National Department of Ag- 
riculture, (2) state agricultural colleges, (3) experiment stations, and 
(4) demonstration farms. The Department of Agriculture, through 
its various bureaus, conducts all kinds of investigations and experi- 
ments, employing in its great laboratories a large body of experts. 
The results of its experiments, together with the results of the work 
done at the experiment stations, are published in books and pamphlets 
and sent into all parts of the country. 

The state agricultural colleges are doing work similar to that 
done by the bureaus of the Department of Agriculture. They conduct 
experiments in their laboratories and on their farms and publish the 
results for dissemination among the farmers. In addition to this 
work is that of instructing young men and women in the principles of 
agriculture, horticulture, dairying, and all branches of farming. The 
colleges also hold farmers' institutes where short practical courses 
are given to farmers, old and young. Lecturers are also sent out, and 
demonstration trains tour the country to get farmers interested in 
new ideas. • 

There are now about 60 experiment stations established by the 
national government, there being at least one in each state. These 
ure large practical laboratories where theories worked out in the agri- 
cultural colleges and by the bureaus of the National Department of 
Agriculture are put to the test in the actual cultivation of crops. 
Both the colleges and the government bureaus experiment with grow- 
ing plants; but the experiment stations are not so much concerned 
in discovering new principles as in testing these principles to find out 



ELEMENTS OF ECONOMICS 97 

whether or not they are of any practical value. For conducting this 
work Congress appropriates $30,000 yearly to each experiment 
station. 

The numerous demonstration farms, as the name implies, are 
for the purpose of carrying to the farmers in a practical, convincing 
way, the general knowledge gained from all the various sources. 
These farms are conducted on a paying, business basis. The value 
of the new ideas is shown in better crops and larger profits than 
the ordinary farm can show. Nothing convinces like seeing a thing 
tried. And each farm serves as an object l-esson to the farmers 
around. 

58. LINES OF INVESTIGATION. Experiments and investiga- 
tions are condutced along various lines, six of which are of special 
importance, (1) soil analysis, (2) defects of soils, (3) plant adapta- 
tion, (4) dry farming, (5) plant development, and (6) diseases of 
plants. 

Soil analysis is the basic study which naturally leads to the 
other lines of investigation, especially defects of the soil, plant adapta- 
tion, and dry farming. Soils vary greatly in character. Some are 
sandy, some are clay and some are black loam. Most soils contain 
all three of these elements, but the predominant element gives the 
name to the soil. Other elements are needed, such as potash, 
nitrogen, phosphates and other minerals. Different soils are studied 
and classified. 

Soil analysis not only shows the elements of healthful, normal 
soils, but it discovers defects in soils. One of the most important 
defects of soils is the lack of one or more elements essential to plant 
growth. The chief cause of the abs-ence of these elements is that 
the same kind of crop has been grown year after year and nothing 
put back into the soil. Such soil is said to be "worn-out" and is not 
to be confused with poor soil. Worn-out soil may be rich in all but 
a very few elements, while poor soil is lacking in most of the elements 
essential to plant growth, and (Consequently worn-out soil is more 



98 ELEMENTS OF ECONOMICS 

easily made fertil-e than poor soil is. One of the most important ele- 
ments taken from the soil by growing plants is nitrogen. During 
the days of the Roman Empire it was discovered that by growing 
leguminous plants, such as beans, peas and clover, worn-out soil would 
be recuperated. This discovery led to the practice of rotation of crops, 
that is, planting alternately leguminous crops and other crops. But 
th'8 causes of the recuperation of the soil by such rotation remained 
a secret until modern science revealed the fact that certain forms of 
bacteria gather around the roots of leguminous plants and draw 
into the soil nitrogen from the air. Scientists have learned how to 
grow these bacteria, and by spreading them over the field the soil 
is "inoculated" with the nitrogen forming bacteria, thus assisting 
nature in her efforts to restore the soil to its natural fertility. It has 
been shown that land lacking in nitrogen chiefly can be restored to 
fertility at a nominal cost of a few cents an acre by the process 
of "inoculation" and that the results are as effective as when com- 
mercial fertilizers are used costing $30.00 an acre. If worn-out 
soils lack other elements besides nitrogen, other fertilizers must 
be used. 

Soil analysis also prepares the way for the study of plant adapta- 
tion. Different kinds of soil are suited to different kinds of crops. 
Some crops do best on sandy soil, others need a rich black loam, 
others do fairly well on clay lands that are not fit for other kinds 
of crops. Again, some kinds of plants do well on wet lands and 
others will grow well on dry lands not fit for ordinary crops. Two 
notable examples of plants suited to dry soils are alfalfa and durum 
wheat. Alfalfa, sending its roots many feet into the soil, is fast 
becoming an exceedingly valuable crop on our semi-arid plains of 
the West and it is transforming that formerly uninhabitable region 
into one of the most wealthy farming sections of the whole country. 

A fourth line of investigation which the various governmental 
agencies are conducting is plant development. Some phases of plant 
development are quite simple, and farmers can do much to improve 



ELEMENTS OF ECONOMICS 99 

the quality and quantity of crops. By using proper methods of 
selecting and testing seeds, crops may be increased by one-third or 
more at practically no extra cost. Other phases of plant develop- 
ment require the scientific knowledge of the expert. The little sour 
apple has been developed into numerous varieties of excellent flavor, 
large and prolific. Grapes have been developed from the little sour 
fruit of the forest; and most wonderful of all is the development 
of the cactus plant. Burbank, the wizard of the plant world, has taken 
the prickly, worthless cactus of the desert and developed it into a 
spineless fruit with little apples good for man to eat and with a 
fibrous part that makes good food for cattle and horses. Some 
day our barren deserts may blossom with this new wonder, and 
happy millions may dwell in the now desolate regions. 

Closely related to plant development, plant adaptation, and rem- 
edying the defects of the soil, is "dry farming." Some plants, like 
the cactus, alfalfa, and durum wheat, have by development been 
adapted to our dry soils. Dry farming also includes methods of 
cultivation suitable to a semi-arid region. Lack of moisture is also 
one of the defects of soils; hence this subject is related in several ways 
to the other lines of investigation. Dry farming is also a special 
phase of the wider subject of scientific cultivation. Each kind of 
soil must be handled differently. Where there is plenty of moisture 
farmers can learn fairly well by experience how to handle different 
kinds of soils; but where there is not enough moisture to grow crops 
by the ordinary methods of cultivation known to farmers there is 
special need of government aid in working out proper methods of 
cultivation, for farmers cannot make their living while learning by 
experience. The vast region lying between the 99th meridian and 
the Rocky Mountains is semi-arid and most of it cannot be irrigated, 
and if it is reclaimed it must be done by dry farming. The land is 
naturally very fertile and if crops could be grown proportionate 
to the richness of the land it would support a dense population. Some 
portions of the country west of the Rocky Mountains are also suited 



100 ELEMENTS OF ECONOMICS 

to dry farming. Dry farming is therefore one of the most important 
agricultural problems in the United States. 

The national government and the various state governments of 
the West are studying methods of farming suited to the semi-arid 
regions and a few principles have been established, though as yet 
no complete science of dry farming has been worked out. Among 
the principles thus far discovered, three are interesting and important. 
(1) The seed bed must be fine and mellow, but fairly compact, to se- 
cure proper germination of the seed; (2) the soil must be in a recep- 
tive condition, so that what little rain does fall will not run off; and 
(3) the soil must be in a retentive condition, so that the moisture will 
not quickly evaporate. Beyond these few principles nothing is yet 
established and no universal rule can be laid down applicable to all 
kfnds of dry soils. It was once thought that all dry lands should 
be plowed deep and cultivated shallow so as to create a dust mulch. 
But it has been proved that these are not universal rules. A fine 
dust mulch, for example, is not always best since a light rain may 
cause it to "puddle" and not allow the water to sink down into the 
ground. 

A sixth line of investigation is to discover the causes of diseases 
of plants. This is a vast subject, as it is coextensive with agricul- 
ture. Parasitic insects of many kinds kill forest trees, fruit trees, 
and many other plants; various kinds of weevil destroy grain, fruit, 
cotton, and other plants; the Hessian fly destroys the wheat; grass- 
hoppers sometimes become so numerous that they eat up all vegeta- 
tion over wide areas. Some progress has been made in discovering 
means of destroying these and numerous other pests that annually 
destroy millions of dollars' worth of grain, fruit and other crops. 
Much, however, remains to be done in this great field. 

59. CHILD LABOR. It is not harmful but beneficial for chil- 
dren to labor, if the work is healthful, not too severe, and does not 
interfere with their main business of getting an education, for such 
labor develops the child physically, gives him a right attitude to- 



ELEMENTS OF ECONOMICS 101 

wards labor and trains him in habits of industry. The child labor 
problem is concerned with conditions that are harmful. Probably 
over a million children in the United States, under 15 years of age, 
are working under conditions that are very injurious. In mines, 
factories, canneries, and other establishments children are being 
stunted, mentally, physically, morally. In order to develop properly, 
children must have proper play and exercise, but hard, monotonous 
work prevents normal development. Long hours, unhealthful condi- 
tions, and evil companions work a greater harm to children than 
to adults. Lack of education is an attendant evil. Recent investi- 
gations by the National Child Labor Committee show that 44 per 
cent of the white children in the mill districts of Georgia are illit- 
erate. The worst evil of child labor is probably the destruction of 
all ambition. Ruined in mind and body, robbed of the birth right 
of every American child, an education to fit him for the battle of 
life, ambition, the mainspring of human energy, destroyed, thousands 
of children are yearly turned out of our factories to become a prey 
upon society, for at the age of maturity they are unfit for any occu- 
pation and they become tramps, robbers or invalids. 

The country is beginning to realize the seriousness of the situa- 
tion and states are passing laws to restrict child labor and prevent 
evil conditions. These laws limit the age at which children may be 
employed in certain industries, limit the hours of labor, and pre- 
scribe certain regulations protecting the life and health of the chil- 
dren. In many states the age limit is 14, which is entirely too low, 
for children of that age are too young to stand the strain of modern 
industry, nor have they sufficient education to prepare them for life's 
work. Many states have fairly good laws, but owing to defective 
machinery of government, the dishonesty of parents, and the trickery 
of employers, these laws are not well enforced. A public registry 
of births would prevent the parents from understating the ages of 
their children. But the defective machinery of government is not 
so easily remedied. The factory inspector is too often the appointee 



102 ELEMENTS OF ECONOMICS 

of the employers, since the employers have such a powerful influ- 
ence in the government. If the school authorities had charge of 
the enforcement of factory laws in so far as they are applied to 
children of school age, such laws would be better enforced, for school 
authorities are not usually subject to political control and they are 
anxious to keep the children in school as long as they can. 

In addition to such laws, properly enforced, remedies are needed 
which remove the causes of child labor. The wages of the father 
should be sufficient to enable him to support his children, and widowed, 
mothers without proper means of supporting their children should 
l*eceive pensions, as they do in some states. Our educational system 
should be adjusted to the needs of the times so that both parents 
and children will feel that the school will help them in the practical 
work of getting a living; and finally all states should have laws 
requiring children to attend school until they have reached a cer- 
tain age. 

The subject is a difficult one for the states to deal with and 
is properly a national problem. The standards of the states are very 
different and the state with the lowest standard has an advantage 
over the other states. Where the age limit is low and employers 
can get children at low wages, there certain kinds of industries will 
gather, deserting states with higher standards. And sometimes when 
a state is trying to protect its children by a good system of laws,. 
the children are taken to other states and exploited a portion of each 
year. For example, hundreds of workers between the ages of 6 
and 7 are taken from northern cities to work in canneries in cer- 
tain southern states during the winter season, when by the laws 
of their home states the children should be in school. Congress, hav- 
ing control of interstate commerce, could help secure uniformity in 
child labor laws among the states, or at least correct the evils of the 
lack of uniformity, by passing a national child labor law and exclud- 
ing from interstate commerce all goods produced under conditions 
contrary to that law. Bills of this character have at various times 



ELEMENTS OF ECONOMICS 103 

been introduced into Congress but as yet have failed to pass. 

60. INDUSTRIAL EDUCATION. A problem of vital importance 
that has quite recently begun to receive attention is industrial edu- 
cation. Modern industry demands that a certain proportion of its 
workers have special training. In modern universities and profes- 
sional schools society trains men for the professions. Commercial 
and business courses in high schools and private business "colleges" 
are preparing boys and girls for office work. Until recently, how- 
ever, the great mass of industrial workers who must receive training 
have obtained it under the apprenticeship system. But many trades 
are more readily learned in a technical or trade school than under the 
apprenticeship system, because they learn the science underlying the 
practice and rules of the trade. It has been demonstrated that in 
trades that must be learned largely by the apprenticeship system there 
is a gain in efficiency by previous study of the general principles of 
the trade in school. 

The United States has fallen behind the great nations of Europe 
in facilities offered for vocational training. Our numerous pri- 
vate business schools and business courses in high schools prepare for 
office work and our universities give courses in science that prepare 
for the professions. But we have neglected the masses of the peo- 
ple. A national Commission on Vocational Education appointed by act 
of Congress to investigate the needs of vocational education in the 
United States reported in 1914 that of more than 25,000,000 workers 
in agriculture and industry, less than one per cent have had adequate 
training. Our rich natural resources have enabled us to hold our 
own in competition vdth other countries. But our business men have 
been greatly hindered by the scarcity of skilled workers and they have 
to some extent train their own employes by establishing schools for ' 
them in the factory, shop or store. European countries, feeling the 
need of training their workers to enable their business men to com- 
pete with America, with its richer natural resources, have established 
vocational schools for the common people, and now American indus- 



104 ELEMENTS OF ECONOMICS 

try, to hold its own, is importing skilled labor from Europe. 

Several states are taking steps to supply tKe growing need of 
vocational education in this country and technical and vocational high 
schools are being established. For six years efforts have been made 
by a few interested in the subject to get a bill through Congress 
giving aid to the states in establishing vocational schools. The bill 
failed to pass the 62nd Congress, but a commission was appointed to 
investigate the subject. 

Theoretically, there is no question as to the wisdom of establish- 
ing vocational schools for the masses, providing the cultural and 
social phases of education are not neglected. But the problem pre- 
sents great practical difficulties. One of the chief problems is. Shall 
trade schools be established which actually prepare pupils for taking 
up a trade without apprenticeship, or shall the foundations of several 
allied trades be learned so that the boy can more intelligently choose 
his vocation when he gets through school and can learn it with a 
short apprenticeship? If we attempt to teach the trades fully in 
school, two difficulties at least are encountered. One difficulty would 
be to provide at a reasonable expense instruction and practice in all 
the trades. There are hundreds of trades in modern industry, and 
in each community there are usually a large number. In small cities 
instruction would be offered in only a few of the main trades of the 
locality, which would result in an oversupply of skilled labor in some 
trades and a scarcity in others, with the consequent waste of social 
energy. In the second place, there is danger of increasing the num- 
ber of misfits in life if boys choose their occupation too young. If 
they have an opportunity to learn the elements of several trades in 
r school they choose their vocation more wisely after they have finished 
this prevocational education. Other practical difficulties present 
themselves, but enough have been given to show that the problem 
should be studied with care before establishing any elaborate system 
of vocational schools. 



ELEMENTS OF ECONOMICS 105 

CHAPTER VII. 

Monopolies. 

61. DEFINITION OF MONOPOLY. In the strict meaning of 
the term, a monopoly is a company that controls the whole supply 
of a commodity. Absolute monopolies, however, are rare, and for all 
practical purposes a '^monopoly may be considered as any company 
that controls enough of a commodity to enable it to control the price. 
The proportion of the supply that a company must control in order to 
raise prices above the competitive level depends upon the nature of 
the commodity. In .case of a necessity, for which no substitute can 
be found, only a small percentage of the supply need be controlled, 
while in case of a luxury or where a substitute can be found, a large 
percentage of the supply must be controlled in order to raise prices 
above the competitive level. 

62. CLASSES OF MONOPOLIES. Monopolies may be classi- 
fied as natural, legal and artificial. There are different ways of 
classifying monopolies, but this lolassification is helpful, as it is based 
upon the fundamental causes of monopoly. Natural monopolies are 
of two kinds, those that own the source of supply of the commodity 
controlled and those that are able to drive out competitors by the 
advantages of large-scale production. An example of the former 
is the anthracite coal monopoly, a vast combination of companies con- 
trolling practically all the hard coal in the country. Examples of 
the latter kind of monopolies are, (1) municipal monopolies, such as 
street railways, gas and electric lighting companies, (2) telephone 
and telegraph companies, and (3) railroads. These are monopolies 
because the unit of maximum efficiency is so large that the whole 
market is supplied more cheaply by one company than by two or more. 

Legal monopolies owe their power to a patent, a copyright, 
or a monopoly charter. A business owned and conducted by the gov- 
ernment is also a legal monopoly, such as the postoffice. Natural 
monopolies, such as railroads and street railways, frequently possess 



106 ELEMENTS OF ECONOMICS 

certain patent rights that help them maintain their monopoly; also 
the ownership of especially advantageous terminal facilities may 
help a railroad in its fight with rivals. 

Artificial monopolies are those that maintain their monopoly 
power by means of some unfair advantage over rivals. It may be 
a high tariff rate which shuts out competition from foreign coun- 
tries and enables home producers to combine and raise prices above 
the competitive level. A special favor from a railroad in the form 
of low rates may -enable the favored company to undersell rivals and 
drive them out of business, and then prices are raised above the 
normal rates. If any rival threatens to come into the field it can 
easily be driven out because prices may be temporarily put so low 
that the new comer pannot make any profits and still the favored 
company can make a fair return on its capital. Again, if a company 
is very large it may use "unfair" means to keep competitors out. 
Among the "unfair" means is that of temporarily lowering prices 
until the rival is ruined. A large company may have many estab- 
lishments in different parts of the country and it could afford to 
run one establishment at a loss in order to drive out a small rival. 
Just what kinds of business come under the head of artificial mon- 
opolies is not an easy matter to decide. No monopoly may be 
wholly artificial, for all may have some element of legal or of 
natural monopoly. The most important practical problem before 
the country at the present time regarding monopolies is whether 
or not the great manufacturing monopolies are natural or artificial 
or a combination of the two. 

63. FORMS OF COMBINATION. In the growth of monopolies, 
both natural and artificial, various forms of combination arose. The 
most complete union of competing companies is actual consolida- 
tion into one company. But as a rule, at least when combining com- 
panies were large, each constituent company has maintained its own 
Identity, having its own officers, and to a certain extent pursuing 
its own policy. The more important forms of this class of com- 



ELEMENTS OF ECONOMICS lOT 

binations are the friendly agreement, the pool, the trust, the hold- 
ing company, the community of interest, and interlocking director- 
ates. There have been two periods in the growth of combinations re- 
sulting in complete consolidation. The first was the consolidation of 
small concerns into large ones, seemingly to secure the advantages 
of large-scale production. Usually these consolidations did not result 
in monopoly. This was the first step in the fierce competition among 
manufacturing firms in the '80's that resulted in the pool, the trusty 
and other forms of combination. The second period in the growth 
of consolidation is, according to Professor Taussig, the last stage 
in the development of monopoly, during which the more loosely 
organized monopoly becomes a giant corporation. Attempts of law- 
makers to prevent the looser forms of organization have sometimes 
driven the companies into this form of organization; and it is yet 
an open question whether or not such a combination can be attacked 
through the courts, since there may be no rivals, hence it cannot 
be shown that competition is stifled. 

The loosest form of combination is the agreement to main- 
tain rates or prices or to act in harmony in other ways. This 
form of combination also has had two periods of development. Dur- 
ing the first period there were many competitors and it was hard 
to compel them to keep their agreement, since their contracts were 
illegal and each gained an advantage by breaking his contract, pro- 
viding others kept theirs. The second period of growth resulted 
from attempts to break up the more tangible forms of combination, 
and today many of the greatest monopolies are apparently of this 
form. It has become easier for the few great companies that re- 
main after the smaller ones have been crushed to keep their agree- 
ments than it was for many companies to keep them, and moreover, 
they have learned by experience that it is best for all in the long 
run to keep their agreements. 

The pool is much like the friendly agreement, the only distin- 
guishable difference being the existence of an informal joint, com- 



108 ELEMENTS OF ECONOMICS 

mittee to see that agreements are maintained. Each company main- 
tains complete control over its own affairs, fixing prices, hiring its 
own help, appointing its own officers, and possessing the legal power 
to ignore agreements with other companies that create monopoly. 
The essence of these agreements were either to divide the territory, 
to divide a certain percentage of the profits, or to limit the output 
and maintain certain prices. In any of these agreements monopoly 
is sQcured. 

Pools were made illegal either by court decisions or by law, both 
state and national, and the trust sprang up. The trust is a com- 
bination formed by each competing company placing the majority 
of its stock in the hands of a common board of trustees who issue 
to the stockholders certificates of stock held by the board. Each 
company maintains its own organization but the board of trustees 
holds the majority of the stock of each company and can thus con- 
trol the policy of each; hence )Oompetition is absolutely suppressed. 
There is in reality but one company, though in form there are several. 

The trust was declared illegal both by state and national law, 
the Sherman Anti-trust Act of 1890 expressing the will of the 
nation that monopoly in any form should not exist. Straightway 
the captains of industry got their heads together and the holding 
<jompany sprang into being. In this form of combination a charter 
is obtained from some state allowing the new company to pur- 
chase and hold stock of other companies. On the surface there is 
no voluntary agreement on the part of the combining companies 
to enter into a combination, as there was in the case of the trust. 
The monopoly appeared to be the accidental result of an outside party 
l)uying up the majority of the stock of companies that happened 
to be in the same line of business. And to buy property seemed to 
be the natural right of every one. In reality there is no essential 
difference between the trust and the holding company, the new 
corporation performing the same furections that the board of trustees 
jperformed, and in both cases the leading men controlling the com- 



ELEMENTS OF ECONOMICS 109 



bination were not an outside concern,* but the leading men in the 
combining companies. It seemed for a time that the holding com- 
pany would not be open to attack through the courts, but after 
some hesitation the courts brushed aside legal subtilities and de- 
clared a holding company contrary to law if it actually created a 
monopoly. 

A newer and more subtle form of combination is secured by in- 
terlocking directorates. There is no combination in form, and no 
company or body of persons that represents any formal combination. 
Real unity, however, is secured by the men on the boards of directors 
of the different companies being practically the same group. Hence, 
while there is no record of union or of united action, this group of 
men would not pursue a policy for one company inconsistent with 
their policies for all the others. The union is just as real through 
this latter form as through any other and is just as effective. Con- 
gress has recently declared this form also illegal, and what the cap- 
tains of industry will do next remains to be seen. 

The most subtle and the most dangerous form of combination 
is the "community of interest" in which a group of men own the 
controlling interest in several concerns that are supposed to b-a 
rivals. This group of men, instead of appointing themselves direc- 
tors of the different companies, thus forming interlocking director- 
ates, appoint different men on the different boards of directors who 
carry out their orders. These "dummy" directors of the supposed 
rival firms will act in harmony simply because they execute the 
orders of the small knot of m-en who are their common masters. 
The federal courts have definitely sanctioned this form of combina- 
tion, on the ground, apparently, that all individuals have a right to 
own stock in as many companies as they wish and to vote for whom 
th-ey wish for directors of the different companies. In a later case, 
however, the Supreme Court of the United States held that inter- 
corporate relationship through individual stockholders was contrary 
to the Sherman Act. In 1913, in its decree dissolving the union be- 



110 ELEMENTS OF ECONOMICS 

tween the Union Pacific and the Southern Pacific railroads the Su- 
preme Court laid down this principle and the U. S. District Court 
in carrying out the decree of the court above enforced this principle 
to the extent of denying individual stockholders the right to vote in 
both companies if they held stock in both. There seems to be no 
reason why this principle should not hold in the case of manufactur- 
ing corporations as well as of railroads. If the courts adopt this 
new principle and apply it to all corporations it will again illustrate 
the recent tend-ency of the courts to prevent monopolists from evad- 
ing the spirit of the law while seemingly complying with the letter 
of the law. 

64. MUNICIPAL MONOPOLIES. Public service corporations, 
such as street railways, gas and electric lighting companies, and 
telephone companies, are natural monopolies. Two or more com- 
panies in any of these lines of business would require an unnecessary 
duplication of the distributing plant and could not be run as cheaply 
as one company. The law of large-scale production applies in each 
case and the saving is due to economy in the use of fixed capital, 
salaries of head officials, and various other items. Being natural 
monopolies, the welfare of the public is endangered, if the companies 
are not under effective public control. High rates and poor service 
result in unduly large profits; street cars are over crowded; the city 
water is often dangerous to the health of the people; gas is poor in 
quality and of low pressure. 

From the nature of the case, therefore, municipal monopolies 
must either be owned by the city or under public control. Either 
policy has its weaknesses. If the city government attempts to con- 
trol these corporations and keep their profits at a reasonable rate, 
the corporations naturally attempt to evade control by influencing 
either the legislative or the executive departments of the municipal 
government, and if unsuccessful in controlling these departments, 
the corporations sometimes obtain relief from the courts whose judges 
are unduly influenced. Some investigators assert that the municipal 



ELEMENTS OF ECONOMICS 111 

corporations have been the most powerful cause of the corruption in 
our city governments. 

On the other hand, municipal ownership has its dangers. Cor- 
ruption of the government by the corporations is apt to be ex- 
changed for graft and dishonesty among city officials. There are 
other causes of dishonesty in city governments besides the influence 
of public service corporations, "boss" rule being the most important. 
If a political "boss" rules the city, the addition of these other activi- 
ties to the ordinary duties of the city would multiply the opportun- 
ities for graft and corruption. In that case the management of these 
affairs would be ineffici-ent and the people would get no better ser- 
vice and probably the taxpayers would have to help pay expenses. 
The vital point in the whole controversy is whether or not the city 
government is honest and efficient. In European countries, where 
city governments are more honest and efficient than those in Amer- 
ica, municipal ownership seems to have been a success. But until 
American municipal governments can make a much better showing, 
both of efficiency and of honesty, than they have in the past, munici- 
pal ownership does not offer a very encouraging solution of the 
problem of' municipal monopolies. 

Owing to this condition of affairs and the natural individualistic 
tendencies of Americans, our statesmen are turning to another 
jnethod of solving this problem, namely, state control. Within the 
past three or four years twenty states have enacted laws establish- 
ing a state commission to control all the public service corporations 
ivithin the state, including railroads, telegraph and telephone com- 
panies, interurban transportation lines, and all municipal monopo- 
lies. The Illinois law, passed in 1913, may be taken as a good exam- 
ple of this new experiment. The law establishes a state board with 
power to control all public service corporations within the state. 
Among the vast powers of this board three are of special import- 
ance, (1) the regulation of rates, (2) establishing a uniform system 
of accounting, and (3) regulating the issuing of stocks and bonds. 



112 ELEMENTS OF ECONOMICS 

Thus three of the most vital matters in any business is placed in the 
hands of a government board, and a long step is taken tovi^ards social 
control of private business. It remains to be seen v^hether or not our 
state governments will prove more -effective in their control of these 
monopolies than municipal governments have been. This increase 
in the duties of the executive department of our state governments 
may result in strengthening this weak branch of government. 

Some critics think that this is a movement in the wrong direc- 
tion, since it centralizes in the state things that belong exclusively 
to each city. If the city allows itself to be cheated and robbed by 
these public service corporations, say these critics, it is the fault of 
the city, and the best way to get good city government is to let the 
people of the city struggle with the problem until it is solved. But 
whether this movement is wise or unwise, it is growing rapidly. 

65. MANUFACTURING MONOPOLIES. Economists and 
statesmen alike agree that railroads, telegraph and telephone lines, 
and municipal public service corporations are natural monopolies 
and that they cannot be destroyed, but must be either owned or con- 
trolled by the government. It is agreed also that if the policy is to 
be public control, rates and prices are among the things that must 
be regulated. But there is no agreement, either among economists 
or statesmen, as to the nature of the manufacturing, or, as they are 
often called, capitalistic monopolies. Some believe they are artificial 
and ought to be destroyed, others think they are natural and cannot 
be destroyed, and others think they combine elements both of arti- 
ficial and natural monopolies, and that the public policy towards 
them should be to take such measures as will destroy the artificial 
props that sustain these monopolies and then subject them to rigid 
regulation. How far this regulation ought to go is a question, but a 
few of our leading public men advocate the regulation of prices of 
goods made by monopolies, while others hold that such a policy 
would be socialism. None but the socialists advocate public owner- 
ship of these monopolies; and indeed if the public were to own all 



ELEMENTS OF ECONOMICS 113 

the natural monopolies and all the manufacturing monopolies it 
would very nearly constitute socialism, since there would be left to 
private enterprise only farming, retail mercantile business, and 
the small manufacturing establishments. But it may not follow that if 
manufacturing monopolies are artificial they can be destroyed. It 
may be possible that the forms of combination to secure monopoly 
are so subtle and so secret that the existence of monopoly cannot be 
proved in a court of law. If such should prove to be the case, regula- 
tion of prices may become necessary. 

It is clear that we need more evidence before any final decision 
is safe. And what is the nature of the evidence required? The 
main points around which controversy centers are the following: 
When companies combine to form a monopoly do they permanently 
m,aintain the producing plants of the constituent companies or do they 
build a plant large enough to turn out the total supply ? If the lat- 
ter policy is followed it is good evidence that the monopoly owes its 
power to the advantages of large-scale production and is therefore 
natural. If the former policy is followed it proves that the monop- 
oly is not due to large-scale production, using the term production 
in the most limited sense, meaning merely the manufacturing part 
of the process and not including the marketing. There may be va- 
rious economies in marketing, such as saving the cost of advertis- 
ing and of cross-shipments, or obtaining lower rates by shipping 
in larger quantities. Where several rivals exist there is much waste 
in cross-shipments, while under monopoly .control goods would be 
sent from the plant nearest the consumer, thus saving in the cost of 
transportation. If monopolies owe their existence to unfair com- 
petition, the tariff, or railway rate discrimination, it is proof that 
these monopolies are artificial. Another point in controversey is 
concerned with the industrial condition that produced the monopo- 
lies. Some contend that most of the capitalistic monopolies were 
formed in times of industrial depression and that low profits, result- 
ing from competition, drove rival firms into combination in order 



114 ELEMENTS OF ECONOMICS 

to secure the advantages of large-scale production. Others contend 
that most combinations were formed in times of prosperity, and 
conclude from this that the monopolies are artificial. But this point 
would prove nothing, for, whether in times of industrial depression 
or in times of prosperity, firms might combine either to convert losses 
due to unnatural competition into the high profits of natural mo- 
nopoly, or to convert moderate profits into higher profits from ar- 
tificial monopoly. Thus it appears that before we can decide whether 
the manufacturing monopolies are natural or artificial there must be 
more investigation to ascertain the facts and a proper interpretation 
of the significance of the facts discovered. 

66. EVILS OF MONOPOLIES. Before considering remedies 
for monopolies it is well to look briefly at their evils in order to ap- 
preciate more fully the importance of the problem. The chief evil is 
the increase in prices. In the absence of general investigation along 
this line it is impossible to give any general estimate as to how 
much above the competitive rates monopoly prices are. But occa- 
sional investigations reveal exorbitant prices. It is claimed, for ex- 
ample, that the cost of mining anthracite coal is about two dollars 
a ton, while it sells for six dollars a ton and upward; and the presi- 
dent of one of the coal roads asserted that if competition prevailed 
anthracite coal would sell at two dollars a ton. In some industries 
prices are raised and at the same time the quality is deteriorated. 
In order to maintain high prices it is necessary to diminish the out- 
put. Thus is the consumer thrice robbed: 

Another grave evil of monopoly is the lowering of the rates of 
wages. Where any industry is controlled by one company or by a 
few companies who practically work in unison, the individual laborer 
is at a disadvantage in bargaining and must accept whatever wages 
are offered him. The easiest way for monopolists to increase profits 
is to reduce wages, and unless a strong labor union creates monopoly 
of labor the natural result of monopoly of capital is to reduce wages. 
This is especially true in case of skilled or semi-skilled labor which 



ELEMENTS OF ECONOMICS 115 

cannot readily move from one industry to another without sinking 
to the ranks of unskilled labor. 

Another evil is the crushing out of rivals and the consequent 
suffering this entails. If they are natural monopolies, this would 
be only a temporary evil during the stage of formation, and the ulti- 
mate effects would be beneficial, if the monopolies are kept under 
proper control, since one concern can produce the goods cheaper than 
several firms. But if they are artificial monopolies society gains 
nothing in the way of a lowering of the cost of production, and the 
result is an unmixed -evil. A few men gather into their hands the 
best fruits of modern industry. In 1912 the Stanley committee, ap- 
pointed by Congress to investigate the "trusts," submitted a report 
which shows that 23 men were in control of corporations represent- 
ing a capital of $35,521,143,000, which is nearly one-fourth of the to- 
tal wealth of the United States. 

67. THE SHERMAN ANTI-TRUST LAW OF 1890. In the de- 
cade from 1880 to 1890 the movement towards monopoly under the 
form, of the trust became rapid, and many states passed laws to for- 
bid the formation of monopolies. These laws had little effect, be- 
cause the trusts either reorganized under forms that evaded these 
laws or obtained charters in states that had no anti-trust laws. In 
1890 Congress passed the Sherman Anti-Trust Law, which prohibits 
all combinations in restraint of interstate commerce. For a number 
of years the Supreme Court of the United States interpreted the law 
so as to make it apply only to the transportation and sale of goods, 
•and not to the process of manufacturing. But recent decisions have 
interpreted the law so as to include manufacturing establishments 
whose products enter into interstate commerce. 

Many important decisions have been rendered within the last 
few years concerning manufacturing monopolies, four of which are 
especially instructive. In the Standard Oil case of 1911 the govern- 
ment had no difficulty in proving that the holding company of New 
Jersey which controlled the oil interests was a monopoly, and it was 



116 ELEMENTS OF ECONOMICS 

dissolved and the stock handed over to th-e constituent companies. 
But the price of oil was not reduced, and the common opinion is that 
a gentleman's agreement and interlocking directorates prevent com- 
petition now as effectively as ever. The Tobacco Trust case had 
similar results. The companies were reorganized, but prices did not 
fall and no competition seems to exist. One of the most remarkable 
cases was the suit against the Beef Trust. The government spent 
nine years accumulating evidence of monopoly, but the evidence did 
not convince the jury that a monopoly existed. In this case there 
seems to have been a gentleman's agreement, but it could not be 
proved. Yet all who know anything about it seem to believe that a 
monopoly does exist. In 1913 came the Coal Trust case in which the 
government failed to prove that a monopoly existed, though the com- 
mon belief has been that for years a vast network of holding com- 
panies and interlocking directorates had held in its grasp practically 
all the coal mines, railroads, and several other industries in the an- 
thracite region. And the president of one of the coal roads declared 
that competition among the coal companies did not exist. 

Stated briefly, the results of these four cas-es were either that 
the government could not prove that monopoly existed or else it 
compelled the companies to assume other forms of monopoly. Thus 
for over a quarter of a century both the state and the national gov- 
ernments have attempted to destroy monopoly and, as Professor 
Taussig says in his Principles of Economics, published in 1912, "To 
all intents and purposes, this policy of repression has been a flat 
failure." Monopoly is steadily growing in spite of all this repression^ 
To quote from the same eminent authority, "Far-reaching plans and 
ultimate results play a greater and greater part in industry. Still 
more important is the fact that, as large-scale production spreads, 
the number of individual establishments diminishes, and the entrance 
of new competitors grows increasingly difficult. The attempts at 
combination become more persistent and ingenius, and the efficacy of 
a policy of non-interference becomes more uncertain." 



ELEMENTS OF ECONOMICS 117 

68. RECENT ANTI-TRUST LEGISLATION. This failure of 
the Sherman Law to accomplish its purpose led Congress in 1914 to 
enact two anti-trust laws known as the Trade Commission Act and 
the Clayton Act. These two acts merely supplement the Sherman 
Act and seek to destroy monopoly. The main provisions of these 
acts are to prevent unfair competition, to forbid interlocking direc- 
torates and holding companies where the effect is to create a mo- 
nopoly, and to create a commission to enforce anti-trust laws. What 
would be included under unfair competition is to be determined by 
the commission, subject to review by the regular courts. One form 
of unfair competition, however, is specially mentioned, namely, dis- 
criminations in prices in favor of purchasers who promise not to deal 
with rival companies. The form of combination known as the com- 
munity of interest is not forbidden, Congress doubtless agreeing with 
the courts in their earlier decisions that such combinations cannot 
legally be forbidden. A federal commission of five was created with 
general power of enforcing anti-trust laws. It can investigate the 
financial condition and the management of corporations 'engaged in 
interstate commerce, inspect their books, compel the companies to 
make reports of their conditions, and publish such facts as it sees 
fit, except trade secrets. The purpose of making public the general 
conditions of the companies investigated is to invite competition in 
case unusually high profits are revealed. No penalty is named in 
these acts for violation of the provisions prohibiting interlocking 
directorates and holding companies, and apparently the only means 
of enforcing these prohibitions is to fine or imprison offenders for 
contempt of court. Some critics doubt the effectiveness of such a 
penalty and predict that our jails will not be overcrowded with of- 
fenders against the anti-trust laws. 

To what extent does this new legislation supplement or amend 
previous anti-trust laws? In the first place, no new policy is 
adopted; it is the policy of repression rather than regulation. The 



118 ELEMENTS OF ECONOMICS 

three factors relied on to crush monopolies are legislative prohibi- 
tion, publicity in order to invite competition, and the removal of 
certain artificial props that support monopolies. The Sherman Act 
of 1890 prohibited all combinations in restraint of interstate com- 
merce, and properly interpreted would forbid holding companies and 
interlocking directorates. The federal courts in several decisions 
have expressly announced the principle that interlocking directorates 
and holding companies that tend to create monopolies are contrary 
to the Sherman Act. It would not appear, therefore, that anything 
has been added to the Act of 1890 in this direction. A real addition 
has been made, however, in an effort to secure publicity, which may 
invite competition. In 1913 Congress revised the tariff with the 
purpose, among other things, of removing the features that fostered 
monopolies, and several acts since 1887 have endeavored to prevent 
personal discrimination in railway rates. The new anti-trust laws 
seek to remove a third artificial prop supporting monopolies, by 
preventing unfair competition. 

What these laws do not do is significant. They do not attempt 
to regulate the prices of the trust-made goods nor prohibit commun- 
ities of interest. If monopolies still continue to make secret friend- 
ly agreements, or if groups of individuals owning stock in different 
companies still continue to appoint "dummy" directors of these 
different companies, and if firms do not see fit to compete but pre- 
fer monopoly profits, it is difficult to see why this new legislation 
to kill the trusts will be more successful than previous laws have 
been. Time will show the effects of these new laws. 

69. MONOPOLY VALUE. Monopoly prices are determined by 
the laws of consumption and production and the greed of the mo- 
nopolist. The main law of consumption involved is the law of 
elasticity of demand. The monopolist wishes to secure the greatest 
possible net returns. If the article controlled is a luxury of fairly 
wide use among the masses, the law of elasticity of demand would 
induce the monopolist to keep the price moderately low, possibly only 



ELEMENTS OF ECONOMICS 119 

slightly above the normal competitive rate, since a high price' would 
greatly reduce sales and diminish net returns. In case of a neces- 
sity, however, for which no substitute can be found, the monopolist 
has the public at his mercy, and the price may go as high as the 
monopolist dares to put it, for there is the danger of government 
interference if the wrath of the people is aroused. It is now and 
then discovered that some monopolies are making from 40 to 50 per 
cent profits and sometimes more. 

The monopolist also takes into account the laws of production, 
especially the law of large-scale production, if the commodity is 
one for which the demand is elastic. In that case the greatest net 
return will be secured by setting a fairly low price and increasing the 
sales. The interests of the public and of the monopolist coincide only 
when the commodity controlled is a luxury and the law of large-scale 
production applies to it. Unfortunately the chief monopolies con- 
trol the necessities of life, such as anthracite coal, kerosene oil, 
lumber, sugar, farm machinery, steel and iron goods, and many 
others. 

CHAPTER VIII. 

Railroads. 

70. IMPORTANCE OF RAILROADS. Because of their great 
importance we have reserved the railroads for special treatment, 
though they belong with natural monopolies considered in the last 
chapter. Both from their size and their industrial and social im- 
portance railroads are by far the most important single group of 
industries in the country. The railroads of the United States have 
245,000 miles of single track, over 61,000 locomotives, over 2,200,000 
cars, and they employ 1,910,000 men. The capitalized value of the 
railroads is $20,000,000,000, or about one-seventh of our total national 
wealth. 

The industrial and social importance of railroads arises chiefly 
from three characteristics, the enormous size of the business unit, 



120 ELEMENTS OF ECONOMICS 

the cheapening of the cost of transportation, and monopoly. The 
enormous size of the business unit, together with the monopolistic 
character, results in the concentration of wealth and power in the 
hands of a few. The cheapening of transportation directly lowers 
the cost of living and indirectly produces the same results by allow- 
ing the greater extension of territorial division of labor than would 
be possible without the railroad. In former ages industries were of 
a local nature and only the most costly goods were consumed far 
from the place of production. Now we can obtain in great quantities 
the most common articles from the most distant parts of the world. 

The cheapening of the cost of transportation has produced a 
new industrial revolution as important as the first one, which began 
in England in 1760. This new industrial revolution is typified in the 
giant manufacturing corporations made possible by s-ecuring cheap 
bulky materials from distant sources and wide markets for their 
products. Another phase of the new industrial revolution is the lo- 
calization of industries and the growth of great cities at a few favor- 
ed spots, such as New York and Chicago. Localization of industry 
may result from natural advantages of location or it may result from 
the artificial advantage of lower rates. If railroad managers wish 
to build up any city in which they have a personal interest they can 
usually accomplish their purpose by giving that city lower rates 
than other cities are given. Thus railroads involve problems both 
of production and distribution. Owing to the nature of the railroad 
business it results in the concentration of railway capital and power 
in a few men's hands and it aids in the concentration of wealth and 
power in other lines of industry, and entirely too large a portion of 
the world's products goes to our industrial kings and princes. 

71. A NATURAL MONOPOLY. A railroad is a natural mo- 
nopoly resulting from the advantages of large-scale production. The 
chief advantage of large-scale operations lies in the more economical 
use of a large fixed capital. The cost of constructing and maintain- 
ing the roadbed and track is about the same, whether there are two 



ELEMENTS OF ECONOMICS 121 



trains a day or twenty, for among the important causes of wear and 
tear of the track are rains, which wash away embankments and 
bridges, the rusting of the rails, and the rotting of the ties. And 
the cost of running a train of ten cars is not much greater than the 
cost of running a train of thirty cars, for the small train would re- 
quire an engin'ser, a fireman, a conductor, and one or two brakemen, 
and the large train would require only one or two more brakemen and 
a little more coal. And since about half the capital of a railroad is in 
the form of bonds, interest charges remain the same, whether the 
traffic is heavy or light. The cost in salaries for the higher officials 
also would be about the same regardless of the density of the traffic. 
The traffic on a single track might easily become so dense that it 
would not pay to increase it; but another track can be laid without 
increasing the expense in several items, notably, the cost of super- 
intendence, terminal facilities, and right of way. If two tracks are 
not enough, four, six, eight, or more tracks may be laid, and the 
advantages of large-scale production still applies. Hence, one rail- 
road company could handle all the traffic that could conceivably exist 
between two cities or localities. 

As a result of these characteristics, if two or more roads run 
between two cities fierce competition results. If one road can carry 
all the traffic at a cheaper rate than it can carry half of it there 
is a temptation to lower the rates to get the traffic of rivals. By 
lowering rates, say one or two per cent, the volume of the traffic 
might be increased, say, one-third, and the net receipts be greatly in- 
creased. But the rival road in order to hold its traffic lowers its 
rates and possibly goes below the rates of the other road. Then 
there is another drop. This may continue until profits are wiped 
out and one or both roads become bankrupt, and maybe go into the 
hands of receivers. The only way to prevent these disastrous results 
is to form some kind of consolidation by which competition is elim- 
inated, and then rates may be raised above the competitive level, 
and large dividends result. Thus competition seems to be impossible 



122 ELEMENTS OF ECONOMICS 

in the railway world and monopoly is the inevitable result. In an 
address before the American Economic Association at Minneapolis^ 
December 29, 1913, Mr. B. F. Meyer of the Interstate Commerce Com- 
mission said, "There are survivals of the competitive rate, but the 
merest novice in the railway history of the leading countries of the 
world knows that competition alone has nowhere permanently se- 
cured to the public reasonably adequate service at reasonable rates,, 
and in consequence practically the world over the competitive theory 
of railway rate-making has been abandoned." 

72. RAILWAY DEVELOPMENT IN U. S. TO 1850. A brief 
review of the railway history of the United States will reveal 
the natural t endency of railroads to grow in size until a single 
road or combination of roads monopolizes the traffic of a large ter- 
ritory. During the first twenty years of their existence railroads 
were small local affairs and built largely with local capital. The pos- 
sibilities of the railroad were not known and every undertaking 
was an experiment, hence only a small amount of capital would be 
invested in any one venture. There were, for example, about twelve 
roads between Albany and Buffalo, each with a track of different 
width. Consequently, railways were very inefficient as compared 
with great trunk lines and systems with their through-freight and 
passenger traffic. Engines were also small and ineffective. 

Owing to this inefficiency of the early railroads it was not sup- 
posed that they could ever compete with waterways in carrying 
cheap bulky goods. As late as 1850, the main use of railways wa& 
to connect different systems of waterways. Buffalo was the only city 
west of the Atlantic Slope that had rail connection with the Sea 
Board. In the West there were but a few short roads connecting- 
lakes, canals or rivers. Pittsburg, Chicago, St. Louis, New Orleans, 
were without railway connections with the outside world. 

73. DEVELOPMENT OF COMPETING SYSTEMS— 1850-1870, 
Between 1850 and 1870 three great movements stand out prominently, 
a great increase in mileage, the development of the railways as a 



ELEMENTS OF ECONOMICS 123 

system of transportation independent of waterways, and the con- 
solidation of short end to end lines into a continuous line. The 
causes of this expansion of the railways were improvements in lo- 
comotives, cars, the track, and better business management. Ini 
1853 Chicago was connected with New York and the East by a con- 
tinuous chain of separate roads. In 1859 New Orleans was connected, 
with Chicago and the East, and by 1869 there were three lines be- 
tween Omaha and Chicago, and the Union Pacific and the Central 
Pacific together spanned the immense distance between Omaha and 
San Francisco. Thus was developing a vast system of railroads in- 
dependent of waterways. 

Between the Atlantic Coast and Chicago four lines of railroad 
were developing, now known as the New York Central, the Erie, the 
Pennsylvania, and the Baltimore & Ohio. Vanderbilt, one of the first 
great railroad kings, got possession of the eleven short lines between 
Albany and Buffalo in 1853, and in 1869 added to the system the 
Hudson River Railroad, thus securing one system between New 
York and Buffalo, and during the same year connection was secured 
with Chicago. During the same eventful year in the railway world 
the Pennsylvania Railroad secured connections with Chicago, and 
within four or five years the Erie, the Baltimore & Ohio, and the- 
Grand Trunk were competitors for through traffic between the Mis- 
sissippi Valley and the Atlantic Coast cities. With five competing 
lines in the eastern field and three between Omaha and Chicago, and 
with a traffic as yet comparatively light, conditions were favorable 
for railway rate wars in different parts of the country. 

74. POOLS, 1870-1887. The first part of this period was char- 
acterized by destructive competition and the last part by the forma- 
tion of pools. In 1868 the rate on first-class freight from Chicago 
to New York was $1.88 per hundred pounds and the rate on fourth- 
class goods was $0.82. When the New York Central and the Pennsyl- 
vania roads entered Chicago the rate dropped to 25 cents a hundred 
on all classes of freight. Such a low rate was ruinous and a truce 



124 ELEMENTS OF ECONOMICS 

was patched up. But when the Baltimore & Ohio and the Grand 
Trunk reached Chicago the war began the second time and first- 
class rates fell to 25 cents a hundred and fourth-class rates to 16 
cents. All the roads became exhausted and a pool was formed in 
1877. Other pools had been formed in other parts of the country, 
the earliest of importance being the Chicago-Omaha pool. 

The general results of thes-e pools were to establish fairly low 
rates at competitive points, but very high rates at non-competitive 
points. The farmers throughout the northwest felt that the rail- 
roads, which had been granted immense tracts of land and often 
voted sums of money to help them build their roads, were unjust 
and ungrateful. In the meantime farmers' organizations, called 
Granges, had been formed for general improvement of the condi- 
tions of rural life. These organizations turned their energies against 
the railroads and the so-called Granger laws were passed in several 
states. Rates were usually fixed so low that the roads were ruined 
and the laws had to be repealed or modified. Then state commis- 
sions were established, some with power to fix rates, others merely 
with power to investigate and publish the general condition of the 
railroads. These commissions were not very effective and different 
systems of regulations in different states interfered with interstate 
traffic. This made it necessary for the national government to regu- 
late interstate traffic and the next year Congress passed the first 
great national law regulating railroads. Before taking up the study 
of that act and its results it is necessary to consider the general 
subject of rate-making and certain evils that had developed in con- 
nection with it. 

75. RATE-MAKING. Experience has shown that a uniform rate 
per ton-mile on all kinds of goods does not bring the highest net re- 
turns. If a high rate is established cheap bulky goods will not be 
shipped long distances and light valuable goods will not afford suffi- 
cient income. If the rate is low, cheap bulky goods will be shipped 
in great quantities, but less will be obtained from the light valuable 



ELEMENTS OF ECONOMICS 12& 

goods, since a low rate will not materially increase the volume of 
such traffic. This leads to the classification of goods and establish- 
ing a different rate for each class, the rate varying with the value of 
the goods. This is a discrimination against the valuable goods, but 
since the freight charges on such goods would be but a small portion 
of their price, the burden does not seem great, and is not a serious 
hindrance to business. This policy is often called charging what the 
traffic will bear. This is usually taken by the public to m-ean an 
unjust policy by which the people are robbed. If properly pursued, 
however, charging what the traffic will bear is beneficial to the 
country, because cheap bulky goods can be brought from distant 
parts of the world, the available supply increased and prices lowered. 
Another form of discrimination is also beneficial both to the 
railroads and to the people, and for reasons similar to those that 
make discrimination between different classes of goods beneficial to 
both the railroads and the people. This is called market discrimina- 
tion and means giving lower rates per ton-mile to goods far from the 
market than are charged for the same kind of goods produced nearer 
the market. This might be called distance discrimination. This 
policy allows the wheat and other products from the far northwest to 
be shipped to Chicago, New York, or even London, and the railroads 
make more profits and the people get cheaper food. -And even the 
farmers near the market may get lower rates with discrimination 
than without it, because, without the additional traffic the low rates 
on the long haul bring, rates would be higher on the shorter haul in 
order to earn dividends, for it must be remembered that a railroad 
obeys the law of large-scale production. The farmers nearer market 
would, however, lose by the fall in prices resulting from the increase 
of the supply of farm products, but the majority of people would be 
gainers. 

A third form of discrimination is known as place discrimination 
and is usually referred to as the long- and short-haul evil. When 
railroads are competing at certain points for through traffic or agree 



126 ELEMENTS OF ECONOMICS 

i;o maintain a fairly low rate at such points, each road will naturally 
charge high rates at non-competitive points. To illustrate. Several 
roads run between Omaha and Chicago, but places between these two 
cities may have but one railroad. Rates from Omaha to Chicago 
were lower than from, say Atlantic, Iowa, to Chicago, not only lower 
per ten-mile, but the total freight charges were less. This policy is 
injurious to all sections of the country discriminated against and 
tends to build up great overgrown cities at the favored points, and 
is on the whole harmful to the country, since it means monopoly gains 
at the expense of a portion of the community without necessarily 
benefiting the country as a whole by increasing the available supply 
of goods. 

Another evil that developed was personal discrimination. Low 
rates were granted to some company and this favor enabled the com- 
pany to undersell its rivals and build up a great monopoly. Wheo 
rivals were disposed of, prices went up to monopoly rates. Some of 
the greatest monopolies were thus built up, the Standard Oil Com- 
pany being a good example. 

A third evil that grew up, also closely connected with rate- 
making, was stock-watering. When legislatures and commissions be- 
gan to fix rates, the railroads sought to evade the results of this 
regulation by concealing real profits and making them appear much 
less than they were. In various ways the amount of capital stock 
-was increased without increasing the amount of money invested. 
Rates must be high enough to allow a reasonable profit, and if the 
capital can be made to appear twice as great as it really is, what 
would appear as a reasonable rate would be much higher than it 
ought to be. 

76. THE INTERSTATE COMMERCE ACT OF 1887. These 
evils and the Supreme Court decision of 1886 preventing the states 
from regulating interstate commerce led to the passage of the Inter- 
state Commerce Act of 1887. The three main purposes of the act 
were to prevent monopoly and discriminations and to regulate rates. 



ELEMENTS OF ECONOMICS 127 

In order to prevent monopoly the railroads were forbidden to form 
pools, and in order to induce competition, rates were to be published. 
Rates were to be reasonable, and unreasonable discriminations of all 
Mnds, personal, place, market, and between commodities, were pro- 
hibited. The long- and short-haul evil was especially aimed at by pro- 
viding that no common-carrier subject to the act should charge more 
for a short-haul than for a long-haul, if the short-haul were included 
in the longer and if substantially the same conditions prevailed. A 
commission was established with the power and duty of enforcing the 
act. 

The general principle upon which this act is based is that com- 
petition can and should prevail. If Congress had accepted the prin- 
ciple that railroads are natural monopolies and that consequently 
competition is out of the question, pools would not have been pro- 
hibited but welcomed as a means of preventing useless rate wars; 
and in order to prevent pools from resulting in injury to the public 
the pools would have been placed under the supervision of the Com- 
mission. In other leading countries of the world, unless the railroads 
are owned by the public, railway combinations are not only allowed 
but required, and the combinations are under government supervision. 
This is the most effective way to prevent the various forms of in- 
jurious discriminations. If the roads of each natural division of the 
cbuntry are combined, the big shipper cannot extort special favors 
from the railroads by threatening to ship his goods over another 
line. The long- and short-haul discrimination would also be more 
easily prevented, because with combination there is no special reason 
for favoring any locality, unless the railway managers have a personal 
interest in that locality. Congress did not wholly rely on competition, 
however, as is shown by the provision that rates should be reasonable. 
It would seem, however, that a better policy would have been to allow 
combinations to take their natural course and then give the commis- 
sion adequate power to regulate rates and other phases of the rail- 
way business where there is danger of injury to the public. 



128 ELEMENTS OF ECONOMICS 

77. RESULTS OF THE ACT. The act was much less effective 
than its authors anticipated, partly because the courts interpreted 
the law in such a manner as to prevent the commission from exercis- 
ing certain powers that were supposed to have been conferred upon 
it. It was intended, for instance, that the commission should have 
full power to decide the facts in any case and that the courts could 
review only the points of law. The courts, howeve'r, reviewed both 
law and facts, and even allowed the railroads to introduce new evi- 
dence. The railroads took advantage of this and purposely withheld 
part of their evidence in cases before the commission and thus often 
secured in the courts a reversal of the decision of the commission, 
which greatly weakened its power. Owing to this practice and other 
causes of delay cases were often dragged on for eight or nine years. 
With such delays shippers had little hope of securing justice. 

The Supreme Court also limited the power of the commission in 
fixing rates. The commission undertook to establish what it consid- 
ered reasonable rates. But the court decided that the act conferred 
upon the commission power to decide when a rate was unreasonable 
but not to say what the rate should be. This practically nullified 
the power of the commission to regulate rates. 

By interpretation of the courts all the meaning was taken out of 
the long- and short-haul provision. The law allowed the railroads to 
charge more for a short-haul than for a long-haul where conditions 
were sufficiently unlike to justify it. The Supreme Court decided 
that competition with other roads was a condition that justified 
charging more for a short-haul than for a long-haul. This destroyed 
the power of the commission to prevent this evil and enabled the 
railroad to fix rates as they chose where any competition existed. 

78. RECENT LEGISLATION. Several acts have been passed 
by Congress within the last few years greatly extending the powers 
of the Interstate Commerce Commission. In 1906 the Hepburn Act 
subjected the railroads, and other common carriers, such as express 
companies, private-car companies, pipe lines and sleeping-car com- 



ELEMENTS OF ECONOMICS 129 

panies, to which the jurisdiction of the Commission was extended, 
to more strict regulation. Among the most important provisions 
four were of special significance as showing the tendency of public 
opinion towards increasing governmental control of monopolies. The 
powers of the Commission were increased so as to secure honest and 
uniform methods of accounting, rebates and all other special favors 
were specifically prohibited, railroads were forbidden to carry ar- 
ticles of their own production -except timber, and, most important of 
all, the Commission vv^as empowered to fix maximum rates. The pro- 
hibition on carrying goods of their own production was intended to 
prevent such a monopoly as has developed in the coal districts of 
Pennsylvania, where the railroads were gaining control of the coal 
mines. 

The Mann-Elkins Act of 1910 further increased the powers of the 
Commission. An advance in rates can be suspended by the Commis- 
sion, pending investigations as to reasonableness. The long- and short- 
haul question was put completely under the control of the Commis- 
sion. In order to prevent delay in the courts a new court was es- 
tablished called the Commerce Court. It was supposed that such a 
court would be more familiar with the railroad business than are the 
regular courts and, since the new court would give its time exclus- 
ively to such cases, appeals from th-e decisions of the Commission 
would not cause injurious delay of justice. The new court, however, 
proceeded to curtail the powers of the Commission, deciding, among 
other things, that the Commission could not work out any general 
rate schedule but must decide only individual cases. The Supreme 
Court reprimanded the Commerce Court for exceeding its powers, 
and the Commission continued to administer the laws as Congress 
intended. The action of the Commerce Court in this and other mat- 
ters brought it into some disfavor and the climax was reached when 
Judge Archibald of that court was impeached for high crimes, and 
in 1913 Congress abolished the Commerce Court, its work being 
given to the Circuit Courts of Appeal. 



130 ELEMENTS OF ECONOMICS 

In 1913 Congress passed an act authorizing the Commission to- 
undertake the physical valuation of railroads. This will take several 
years, and the use that will be made of such a valuation is a matter 
of speculation. Some think that rates will then be based upon 
physical valuation rather than on the amount of stock issued; others 
think this will not be done, since it is generally supposed that rail- 
roads have been greatly overcapitalized. Some observers believe 
the physical valuation may be the first move towards government 
ownership of the railroads. 

79. THE PRESENT SITUATION. The effect of all these laws 
has been to make the Commission a real power in the railway world. 
The marked success of the Commission led to the establishment of 
the Trade Commission to regulate monopolies in manufacturing and 
commercial industries. Discriminations of all sorts seem to have been 
abolished to such an extent that they are no longer a serious -evil. 
Power to regulate rates and some other matters has been made ab- 
solute and complete by this recent legislation and decisions of the Su- 
preme Court. Thus the main evils of monopoly have been abolished. 

All the laws of both state and nation have not been able, how- 
ever, to prevent combinations and agreements of various kinds that 
practically eliminate competition. This has helped the Commission 
and the courts in their fight against discriminations and to that ex- 
tent monopoly has had beneficial results. The power of the Commis- 
sion to regulate rates enables it to prevent the main -evil resulting 
from monopoly, but other evils of monopoly still remain, especially 
the lack of competition in giving good service. 

There has been several spectacular dissolutions of railway com- 
binations since the passage of the Anti-Trust Laws, which applied 
to railroads in so far as they prohibited monopoly. In the famous 
Northern Securities case (1904), the Supreme Court decided that th-e 
holding company formed in order to combine the three great roads 
that serve th-e Northwest, the Northern Pacific, the Great Northern, 
and the Burlington, was illegal and the Northern Securities Company 



ELEMENTS OF ECONOMICS 131 

was dissolved. Competent observers declare, however, that no com- 
petition 'exists among these roads, which are controlled by the Hill 
interests. Another famous dissolution case was that involving the 
Union Pacific and Southern Pacific roads (1913), in which the court 
held that both interlocking directorates and the community of in- 
terest were illegal. The formal connections between the two roads 
have been severed; but the same men that were associated in the con- 
trol of the two roads are in control' of each company, and there seems 
to be no reason to suppose that the two roads will compete in the 
future. One of the latest cases is that in which the New York, New 
Haven and Hartford was compelled to dispose of the stock of the Bos- 
ton and Maine railroad. These two roads had long controlled the 
transportation business in New England, and some years ago they 
were united by the purchase of stock. The dissolution is too recent 
to enable us to judge of results. 

Despite these and other attacks on railroad combinations, con- 
solidation and combination have steadily continued up to the present 
time. In 1913 there were in the United States ten or eleven well de- 
fined systems. Of the 245,000 miles of railroad in the country, eleven 
systems controlled 200,000 miles. There is a strong tendency for 
consolidation to proceed on a territorial basis. Northern New England 
is controlled by the Boston and Maine, southern New England by the 
New York, New Haven and Hartford; the Vanderbilt system con- 
trols the northern portion of the Middle States and westward to 
Chicago, the Pennsylvania system the southern portion of that terri- 
tory; the territory north and west of Chicago to the Pacific Coast is 
dominated by the Hill interests; and in other parts of the country 
each natural division is coming under the control of some single sys- 
tem. The same results have been reached in other countries where 
the railroads are privately owned, which is additional proof that rail- 
roads are natural monopolies. 

Two changes in policy have been strongly urged and bills em- 
bodying them have been at various times introduced into Congress. 



132 ELEMENTS OF ECONOMICS 

These changes are to allow railroads to combine under the super- 
vision of the Interstate Commerce Commission, and secondly, that 
the Commission be given power to control the issue of stock. The 
feeling is prevalent among the people that railroads have been over- 
capitalized, and that dividends are being paid on stock that is half 
"water." If this is true it is an unjust burden upon th-e people. Even 
if rates are to be based upon physical values when they have been 
estimated, the issue of stock would seem to be a proper subject of 
regulation as a protection to investors. The question of permitting 
combinations has already been discussed. 

Most of the states have 'established commissions with large 
powers, among them being the power to fix maximum rates of traffic 
within the state and the power to control stock issues. These regula- 
tions are not uniform, and control of stock issues by the National 
Government is needed for this reason also. The power of these com- 
missions has been considerably curtailed by recent court decisions. 
Two cases will illustrate this tendency. About two years ago the 
Supreme Court decided that the laws of Congress requiring certain 
safety devices applied to a railroad lying wholly within a state, on 
the ground that all railroads are practically a part of the great 
national system, since goods transported over roads lying wholly 
within a state enter into interstate commerce. In another case the 
court decided that a two cent railway rate was invalid since it dis- 
criminated against interstate passengers, a higher rate having been 
allowed on interstate commerce by the Interstate Commerce Com- 
mission. The governors in their next annual conference protested 
against these decisions as invasions of state rights. 

80. PUBLIC OWNERSHIP. Owing to the marked success of 
government regulation, there is less agitation than formerly for pub- 
lic ownership of railroads, but there is a strong undercurrent of 
opinion in favor of that policy, many high railway officials recog- 
nizing this current of opinion and even welcoming it as a relief from 
the vexation of stringent regulation. Labor unions are demanding 



ELEMENTS OF ECONOMICS 133 

higher wages, stockholders demand larger dividends and the Inter- 
state Commerce Commission insists on keeping rates low for the 
welfare of the public, and railroad officials find themselves in a 
difficult position. 

The arguments for and against public ownership of railroads 
are much the same as those previously considered under municipal 
ownership. Under public ownership the constant struggle between 
the government and the railroads would cease and under a wise and 
efficient government railroads would be made to serve the public. 
The relative efficiency of government management and private 
management is yet an open question, but the weight of opinion seems 
to favor private management, on the ground that a more effective 
civil service system can be employed by a private company than by 
the government, and because the hope of securing large profits is a 
greater stimulus to invention and enterprise than any rewards the 
government will offer. Many believe that until Congress shows less 
inclination to practice log-rolling methods and to emphasize local 
rather than general interests, it would be extremely hazardous to 
place the management of railroads completely under the control of 
the government. 



134 ELEMENTS OF ECONOMICS 

CHAPTER IX. 

Value. 

81. INTRODUCTION. We have thus far considered two of the 
four main divisions of economic sci-ence, consumption and distribu- 
tion, and we now take up the third division, exchange, which involves 
value, money, credit, banking and international trade. The central 
topic in exchange is value, which we have previously defined as power 
in exchange. The problem in value is to determine why one thing 
exchanges for another thing in certain proportions, why, for -exam- 
ple, one pound of sugar is worth about twice as much as a pound of 
flour; why a yard of silk of a certain quality is worth so many pounds 
of sugar, or why a ton of hay is worth three or four tons of coal. 
Money, credit and banking are the instruments of exchange. 

Value involves the laws both of consumption and production, and 
some economists treat of value not as a separate topic but in con- 
nection with production and consumption and other subjects. Nothing 
is gained in clearness by such treatment, however, since value is a 
topic distinguishable from other topics and having its own laws, 
though the elements of those laws lie in other fields. 

82. ADVANTAGES OF EXCHANGE. The main economic ad- 
vantages of exchange are the same as the advantages of the division 
of labor, since exchange results from the division of labor. Exchange 
allows division of labor both at home and between different countries. 
Moreover, since people have different tastes, exchange allows each 
person to dispose of things of little value to him but which may be 
very useful to others, and thus, by exchange, value is increased. It 
is often assumed both by individuals and by nations that exchange 
is a one-sided affair, since only one of the two parties involved de- 
rives any benefit. And, curiously enough, it is assumed that the 
person that sells rather than the one that buys gets the chief benefit. 
This notion is reflected in the laws of trade during the last three or 
four hundred years, which seek to restrict imports and encourage ex- 



ELEMENTS OF ECONOMICS 135 

ports. Since the one who sells disposes of what he does not want and 
the one who buys gets what he wants, it would follow that if either 
^f the two parties to an exchange is the chief gainer it is the one 
who buys. But on the whole there is no reason to suppose that either 
party is the chief gainer, since exchange allows the seller to dispose 
of what he does not need and get what he needs. 

Exchange is also a great civilizer, since in the course of inter- 
national trade ideas are also exchanged. In ancient days the trader 
found his way across the desert between Egypt and Chaldea and set 
the world a-mixing. The Phoenician of the ancient world carried 
the ideas of the East to the rising West, and the progress of the 
New World of that day was hastened. Medieval traders carried 
the Renaissance from the South and East to the North and West, 
and the vigorous, half -barbarians of newer regions became more re- 
fined and enlightened by the best ideas of the race, ideas that had 
survived many an empire and that still survive, and to the end of time 
will help to make man more noble. 

83. MARKET VALUE AND NORMAL VALUE. The term mar- 
Itet has various meanings. In one sense it means a certain place 
where things are bought and sold, usually a certain city, as the 
Boston Market or the New York Market. In another sense it means 
the commercial world in general, as when we say a commodity is 
put on the market. But when we speak of marlret price, both a 
place and a condition are included. It implies a place, either local 
or general, where goods are bought and sold and where conditions 
are such that each commodity sells at a uniform price. This ideal 
condition is, however, only roughly realized, especially in the case 
of retail trade. In the wholesale business both buyers and sellers 
are keen, and a slight difference in price on large sales might make 
or mar one's fortune, hence, wholesale prices must be quite uniform 
in any locality. In the retail trade, however, only one party to the 
bargain is usually keen and fully alive to changes in industrial con- 
■ditions, buyers often paying what is asked without question, and 



136 ELEMENTS OF ECONOMICS 

not a very close watch is kept upon the prices of different dealers. 

Market value is simply the price at which a commodity sells in. 
the market. Normal value is the value or price that gives a normal 
rate of profit. For long periods of time the normal value and the 
market value would tend to coincide; but for short periods the mar- 
ket value may go above or below the normal value. In times of in- 
dustrial depression market prices often do not pay expenses, while 
in "bloom" times that follow an industrial depression market prices 
rise above the average, and more than ordinary profits are made. 
There is much indefiniteness about "normal" profits, because differ- 
ent men are making different rates of profit. There is, therefore, 
much indefiniteness about normal value; but for all practical pur- 
poses the terms normal value and normal profits are sufficiently defi- 
nite to be understood. The average business man would probably 
consider from five to eight per cent normal profits, and in fixing 
prices would attempt to secure at least that rate. 

Market value and normal value are usually treated separately 
by economists, and the general impression conveyed is that the two 
are governed by different forces, market value being governed by 
demand and supply and normal value by cost of production. But both 
sets of forces are at work all the time governing the price of a com- 
modity, whether we consider the price as the market or the normal 
price. The price of everything that sells in the market is determined 
to some extent by its cost, except in a few rare cases, as antique 
furniture, the paintings of the great masters, and things of similar 
character. The force of demand and supply, or of marginal utility, 
may cause the price for a time to go far above or far below the nor- 
mal, but both buyer and seller, especially in the wholesale trade, 
keep the factor, cost, constantly in mind and are governed by it. 
Hence, it seems best to disregard the distinction between market value 
and normal value when the forces governing value are under con- 
sideration. 

84. COMPETITION. Competition is assumed to exist, for, with- 



ELEMENTS OF ECONOMICS 137 

out it there is a monopoly. There are two kinds of competition, mar- 
ket and industrial. Market competition is the competition among 
buyers and sellers of the same commodity, including not only mer- 
chants and 'Consumers, but manufacturers, who also buy and sell. 
There is only one condition of true competition, and that is when there 
are several buyers and several sellers. If there is one seller and 
several buyers, or one buyer and several sellers, or one buyer and 
one seller, there is a monopoly, and true competition does not exist. 

Industrial competition is competition among industries by which 
profits in different lines of business tend to be uniform. This com- 
petition has two phases, one being the competition among different 
industries to sell their products. This is similar to market competi- 
tion, especially when the different lines of business are producing 
commodities that may be used for the same purpose, as gas or elec- 
tricity. There is another variety of competition between companies 
producing commodities that do not serve the same purposes but the 
demand for which is elastic. The buyer has a certain amount to 
spend, and each industry is trying to sell him as much of its products 
as it can, and this tends to lower prices in proportion to the severity 
of the competition. Industrial competition has a second phase, pro- 
duced by capital flowing from one industry into another. If profits 
tend to be especially low in any industry, new capital ceases to flow 
into it and some capital may withdraw, leaving a larger field for 
the capital that remains. If profits are unusually high in any indus- 
try, new capital flows into that industry and market competition in 
that line of business becomes more severe, resulting in lower prices, 
smaller sales for each firm, and lower profits. Thus industrial com- 
petition and market competition, while distinct in a way are never- 
theless closely associated. 

85. DEMAND AND SUPPLY. Demand means desire coupled 
with ability to pay. Supply may mean that which is offered for sale, 
or it may include the portion temporarily withheld from the market, 
or it may include the supply of the near future. The amount actually 



138 ELEMENTS OF ECONOMICS 

offered for sale most powerfully affects the price, because both 
buyer and seller are more fully aware of the relation between the 
amount offered for sale and the amount the consumers demand. The 
portion withheld from the market will influence the price only in so 
far as the business world is aware of its existence and of the likeli- 
hood of its being thrown upon the market. The supply of the near 
future also exerts its influence upon price. This is illustrated every 
year by the fluctuations of the prices of farm products with the vary- 
ing prospects of the growing crops. 

A change in the supply, demand remaining the same, results in a 
change in price because marginal utility is affected and because 
competition forces the price up or down with the rise or fall of mar- 
ginal utility. If, for example, there is an extra large wheat crop 
the price falls because dealers understand the law of demand, back of 
which lie the laws of variation of utility and the law of satiety, hence 
they realize that in order to dispose of the whole supply the price 
must be lowered to tempt people to consume more wheat. Com- 
petition hastens the falling price, because each dealer fears that if 
he does not lower his price others will and he will lose his trade. An 
unusually small crop sends the price up because of a rise in the mar- 
ginal utility; and dealers knowing this take advantage of the situa- 
tion and raise their price. In this case the one who holds a portion 
of the supply for a future rise in price runs no risk of not being able 
to dispose of his stock, since the wants of the people will not be sat' 
isfied and demand will be strong. A change in demand may come 
from changes in wealth, in tastes, or in custom. The frequent and 
often senseless changes in styles of clothing will cause the price of 
articles out of style to fall, whether the amount of such goods on 
hand is large or small. In any case, changes in demand or supply 
are closely associated with changes in marginal utility, hence, mar- 
ginal utility is practically the sam-e force as the relation between 
demand and supply. We may say, therefore, that prices vary di- 
rectly with marginal utility. 



ELEMENTS OF ECONOMICS 139 

86. COST OF PRODUCTION. By the cost of production is 
meant the outlay in terms of money for wages and other expenses 
and the amount of capital involved, jipon which interest is to be reck- 
oned. From the broad point of view of social justice, cost should in- 
clude the sacrifices of labor and capitalist, the most burdensome 
work receiving the highest reward, and prices ranging accordingly. 
But for reasons which we shall &ee later, competition either among 
laborers or among capitalists is not free and hence prices bear no re- 
lation to sacrifices in the different industries. 

A change in cost affects prices because of the effects on profits. 
If, for example, a cheaper process of making shoes were invented, 
g:reater profits would result if the shoes sold at the same price. But 
competition forces prices down. Prices may be maintained at their 
former level until the higher profits of the industry attract new 
capital, when increased competition will force prices down roughly 
in proportion to the fall in cost. Ordinarily, however, if monopolistic 
conditions do not prevail, competition among producers already in 
the industry is sufficient to bring down prices. The laws of con- 
sumption are here at work also, and the producer who fails to lower 
his prices will lose in trade because the demand will be supplied by 
those who sell at a lower price. The law of diminishing utility and of 
satiety are here plainly visible. 

What cost governs prices, highest, lowest or average cost? 
From previous discussions it will readily be seen that different por- 
tions of the supply are produced at different costs. In agriculture 
this is strikingly true because land differs greatly in fertility and 
nearness to market. In other lines of business it is also true be- 
cause of differences in managing ability and in the size of business 
establishments. It is generally considered that highest or marginal 
cost governs prices, because the price must be high enough to cover 
expenses and to leave a sufficient reward to capital, otherwise 
capital would not remain in the industry. Competition will keep 
prices low enough to yield ordinary profits under the most advan- 



140 ELEMENTS OF ECONOMICS 

tageous conditions. Occasionally, prices will go lower than that and 
som^e marginal producers are forced out of business. But on the 
whole, competition will cease when prices are at a point that yields 
ordinary returns on capital at the margin of production, because 
men will not remain in business unless they get about the prevailing 
rate of loan interest. 

In conclusion we may state the general law of value thus: Value 
is governed by marginal utility, marginal cost, and competition, 
with the laws of consumption as underlying forces; marginal utility 
being the force that causes temporary fluctuations of prices above 
or below those which marginal cost would establish as the normal or 
permanent prices. 



ELEMENTS OF ECONOMICS 141 



CHAPTER X. 

Money and Credit. 

87. FUNCTIONS OF MONEY. Money facilitates exchanges and 
thereby aids production, since it makes possible extensive subdivision 
of labor. The difficulties of barter, where there is no money and no 
conception of money, may be illustrated by a concrete case. Suppose 
a man has a horse which he wishes to exchange for a cow. His first 
difficulty would be to find some one who has a cow to exchange for 
a horse. This difficulty is called the lack of coincidence in wants, 
and from the nature of the case is almost insurmountable. The sec- 
ond difficulty would be to estimate the relative values of the horse 
and the cow, for without money as a common measure of value num- 
erous ratios must be known and kept in mind. In the third place 
it would be hard to "make change," for the two things would probably 
not be of equal value, and one of the parties would have to give some- 
thing in exchange. 

Money greatly lessens these difficulties by serving as a common 
measure or standard of value and as a medium of exchange. In the 
above illustration, the man with the horse would need only to find 
some one who wished a horse and with the money secured he could 
then find some one who had a cow for sale, which would be a much 
easier task then to find a man with a cow to exchange for a horse. 
But with the use of money well -established, buying and selling is 
usually a much simpler affair, since there are regular markets, with 
prices approximately known to all. In the case of commodities having 
only a local market there are elements of barter, with some of its 
attendant difficulties; but producers of staple articles have little 
trouble in selling them and buying what they want, except in times 
of industrial depression. Thus, money, being a common measure of 
value and a medium of exchange lessens two of the difficulties of 
barter. If the money is made of a material that can be divided into 
fractional parts without destroying the value it will obviate the third 



142 ELEMENTS OF ECONOMICS ' 

difficulty of barter, that of making change. 

Money performs a third function, which is very important in^ 
modern industry, by serving as a standard of deferred payments. A 
vast amount of business is done on credit, much of it on long-term 
credit, and it is quite necessary to have a well known standard in 
which all debts can be reckoned and paid. 

88. CHARACTERISTICS NEEDED IN MONEY. In order that 
any commodity may serve as money two qualities or characteristics 
are indispensable, it must be universally acceptable and stabl-e in 
value. As a rule a commodity would not acquire the first character- 
istic unless it were fairly stable in value, at least for short periods. 
But to serve as a standard of deferred payments it should be stable 
over long periods. To serve most satisfactorily the purposes of 
money several other qualities are needed, but anything that possesses 
these two qualities may serve as money. In earlier ages sheep, cat- 
tle, or other animals were used as money, though lacking several 
qualities needed, such as portability and divisibility. The two pri- 
mary qualities needed in money are, therefore, universal acceptability 
and stability of value. 

Several other qualities are needed in money. It ought to be dur- 
able, easily distinguishable, divisible, and portable. To enable one to 
tell at a glance the value of a piece of money, coinage has developed. 
At first the coins were crude in workmanship and easily clipped and 
plugged without being detected. But a modern coin enables one to 
know at sight the weight and fineness, hence the value. Old coins 
become worn and are not of full weight, but they are made legal 
tender and when badly worn are recoined, so that in most countries 
today coins circulate freely at their face value. To prevent 
clipping, the edges are milled. By having coins of different denom- 
inations it is easy to make change. 

Another quality needed in a circulating medium is elasticity in 
quantity. In earlier ages when production was chiefly local and on a 
small scale, demand for money was fairly constant, but in modern; 



ELEMENTS OF ECONOMICS 143 

industry demand for money increases during certain seasons of the 
year and during "good times." In order to meet this seasonal and 
periodic increase and decrease in demand the volume of the cur- 
rency should expand and contract. If the volume of currency does 
not increase with the increase in demand, industry is handicapped, 
and if the currency does not contract with the decrease in business^ 
the increase in the currency year after year and period after period 
would in time destroy the value of money. 

89. MATERIALS NEEDED FOR MONEY. Centuries of ex- 
perience has shown that several kinds of material are needed for 
money. For small change the cheaper metals are best, copper for the 
smallest denomination and nickel for the five-cent pieces and silver 
for the ten-cent, twenty-five-cent, and fifty-cent pieces. Gold would 
not do at all for this fractional currency, because the pieces would 
be too small, and experience has shown that gold is not suitable for 
anything under the five-dollar piece. Nor would paper be suitable 
for fractional currency, as was demonstrated during the Civil War. 

Silver is also used for the dollar-piece, but paper is more con- 
venient, as was shown when our government attempted to circulate 
large quantities of silver under the Bland-Allison Act of 1878. Only 
about sixty million dollars would stay in circulation, the remainder 
finding its way into the banks and the government treasury. When 
silver certificates were issued a few years later in denominations of 
one, two, and five dollars, they remained in circulation. Experience 
shows, therefore, that for large change as it is called, that is, de- 
nominations of one, two, five, and ten dollars, for use in retail trade 
paper currency is more convenient than any metal. For wholesale 
transactions bank checks are the most convenient of any form of 
currency, being safe and easily made out for any amount. To meet 
the need for paper currency we have in the United States as the 
result of a patch-work of legislation several kinds of paper cur- 
rency, including the United States notes, popularly called Green- 
backs, issued during the Civil War, Treasury notes (Act of 1890), 



144 ELEMENTS OF ECONOMICS 

national-bank notes, Federal Reserve notes (Act of 1913), gold and 
silver certificates, and checks. 

Back of all this paper currency must be a certain amount of 
standard money in order to keep the value of the paper from falling 
below the value of gold. Centuries of experience has shown that 
unless the authority issuing paper currency provides for its re- 
demption on demand in the standard money of the world, the paper 
will depreciate. Hence, stated briefly, the business world needs 
copper, nickel, and silver for fractional coins, paper for larger de- 
nominations, and gold as reserves to keep the paper from depreciat- 
ing in value. 

90. CREDIT CURRENCY. Besides common book credit, which 
is incidental to barter and to the custom of paying bills a month af- 
ter goods are purchased, there are five forms of credit instruments, 
A credit instrument is both a substitute for money and a promise to 
pay money on demand or in the future. It circulates as money only 
because the public believes the one making the promise to pay money 
will do so if the money is really needed. 

The most important credit instrument is the bank check. A 
check is the order of one person for the bank to pay to another per- 
son a certain sum of money, usually on demand. The check is not 
considered as money by the business world, because it does not cir- 
culate freely as the bank note does. The check is not a promise of 
the bank to pay, except on the condition that the drawer has money 
on deposit, hence the person receiving a check has no assurance that 
it will be cashed by the bank, except the honor of the one drawing 
the check. Also a check passes only on endorsement. For these 
reasons checks are usually presented to the bank by the payee im- 
mediately or within a few days after they are issued. Though not 
considered as money checks do the work of money. The individual 
check may be restored to the bank and be cancelled within a few 
hours after it is issued, and thus cease to circulate, but in most cases 
actual cash is not received for it, but instead credit on the books of the 



ELEMENTS OF ECONOMICS 145 

bank is given to the payee, and checks are drawn against it. Thus 
the volume of check currency, or deposit currency, as it is called, is 
maintained and checks serve as a circulating medium. For whole- 
,sale trade the check is the most convenient form of currency yet de- 
vised. If, for example, a person wished to pay a sum of $1253.24 it 
would be much easier to write out a check for that amount than to 
count out the money, and the check is much safer to carry around. 
For retail trade, however, the check is not convenient, except for 
paying bills at the end of the month, because most people would not 
be sufficiently well known by retail dealers, and people do not wish 
to bother with checks for small amounts. 

Bank notes are considered as money by everybody, because they 
circulate freely without endorsement. They are the promises of the 
bank to pay, and banks are well known institutions, supervised by 
the government, hence their promises to pay money are as good as 
money. Being universally acceptable and in denominations suitable 
for small transactions, the bank note is especially convenient for the 
retail trade, and for paying laborers. The custom of paying laborers 
by check is growing, however, and in time may become universal. 
Bank notes are not as good as checks for the wholesale trade, for 
they are not safe, though they might be fairly convenient by being 
made in large denominations. The danger of carrying large sums 
of money is so great that checks are used almost exclusively in 
wholesale transactions. 

A third instrument of credit is the draft or bill of exchange. A 
bank draft is an order of a bank for another bank to pay a third party 
a certain sum of money. Drafts are used in paying debts due outside 
the immediate neighborhood, that is, in other cities or foreign coun- 
tries. They are substitutes for money in making such payments, 
though they do not circulate as money. In foreign trade or in small 
transactions between persons of different parts of the country, the 
draft is very convenient, because it is safer than money, it is cheaper 
i;o send, and also saves the use of real money. By the use of drafts. 



146 ELEMENTS OF ECONOMICS 

hundreds of millions of dollars worth of goods are annually ex- 
changed without the use of money, except a certain per cent for 
bank reserves. Suppose a New York merchant has ordered goods. 
from London. Instead of sending gold, upon which he would pay ex- 
press charges and insurance, he gets from his bank, by paying cash or 
by giving his personal note, or some other form of commercial paper, 
a draft in favor of the London merchant. Hundreds of other New 
York merchants as well as merchants in other large cities are also 
paying debts by drafts on London. In London merchants who have 
purchased goods from America are sending drafts to their creditors. 
Thus the New York banks are receiving money, or commercial paper,, 
for drafts on London and are paying out money for or receiving on 
deposit, drafts on New York from London. In case New York mer- 
chants and London merchants import equal amounts, accounts would 
balance and no money would be sent either way. But in case New 
York imported more goods than it exported, the balance must be 
sent in gold, if such a condition remains permanent or even lasts for 
several months. America is said to have an unfavorable balance of 
trade, and the amount paid for drafts, called the rate of exchange,, 
rises, because the American banker must ship to the London banker 
the gold which the London banker is ordered to pay to London mer- 
chants. 

A new form of credit instrument has recently been devised, known^ 
as the traveler's check. This is much like the draft, except that the 
one who gets the draft from the bank is also the payee, and the sig- 
natures of the bank officials and of the payee are on the traveler's: 
check. The advantages of the traveler's check are that it is safe^ 
since no one can cash it except the payee, and identification is pro- 
vided for by having the payee sign the check when made out and 
again when collected. 

A fifth form of credit is the personal promisory note. The 
promisory note takes the place of money only to a very limited ex- 
tent, since only the individual and not a bank stands back of the 



ELEMENTS OF ECONOMICS 147 

note. The main use of the personal note is to obtain the various 
forms of bank credit, the bank exchanging its credit for the credit of 
the individual. Hence, personal notes are the pledges upon which 
bank credit is largely based. 

91. CHANGES IN THE VALUE OF MONEY. PRICE TABLES. 
The value of money, that is, its general purchasing power, changes 
greatly from time to time, and such changes vitally affect the welfare 
of different classes of people, especially debtors, creditors, wage 
earners, and all persons receiving a stipulated annuity. If the value 
of money falls, debtors are benefited, if they belong to the producing 
classes, since higher prices would give a larger money income while 
the debt would not increase. Creditors, on the other hand, would be 
injured. If the value of money falls, that is, if prices rise, laborers 
are for a time injured, since the rise in wages always lags behind a 
rise in prices. In order to judge of the importance to society of 
changes in value of money we must know how to estimate the amount 
of the changes. 

Changes in the value of money, that is, changes in the general 
level of prices, are estimated by the device known as price tables. 
Suppose we wish to know how much the general level of prices has 
risen during the last ten years. We select a number of important 
commodities, say twenty or more, and ascertain the price of each 
now and ten years ago. The price of each commodity ten years ago 
is taken as the basis from which to reckon, and called 100 per cent. 
Then the present price of each article is compared with the price 
ten years ago and the percentage of the rise or fall of each commodity 
is determined. Then the average rise is found of articles whose 
prices have risen, and the average fall of those whose prices have 
fallen, and the difference between these two averages gives us the 
general average rise or fall of all articles in the table. 

The practical value of a price table depends upon the number and 
kinds of commodities selected. The ideal table would contain all com- 
modities on the market and each would be given weight in our table 



148 ELEMENTS OF ECONOMICS 

in proportion to the amount consumed. Practically, such a table 
is impossible, and we must therefore choose a sufficient number of 
important things. If, for example, flour has risen ten per cent and 
salt has fallen twenty per cent, this would indicate a fall in prices. 
But such a conclusion is absurd, for obvious reasons. Different tables 
would show different results. If we wished to know whether th-e 
cost of living for working men has risen or fallen and how much, 
we should include in our table only such articles as are ordinarily 
consumed by the working classes, and these should be weighted 
as it is called. That is, if three times as much money is spent upon 
one thing as upon another, the percentage of rise or fall of the 
more important article should be multiplied by three before an aver- 
age is obtained. When price tables are properly made up they are 
of great value in helping to solve many social problems. Minimum 
wage boards, for example, must use the knowledge obtained from 
such tables in reaching any just conclusion as to the proper rise in 
wages as the cost of living advances. 

92. CAUSES OF CHANGES IN THE VALUE OF MONEY. The 
value of money is a ratio between gold and goods, since the value 
of anything is measured by its power in exchange; and since the 
purchasing power of money is determined by its power in exchange 
for all kinds of goods, the value of money and the general level of 
prices are convertible terms. The value of money being a ratio, any- 
thing that affects either side of the ratio affects the value of money. 
The forces affecting the value of money, therefore, would include 
all the forces that might affect either gold or goods. Theoretically, 
there are twelve such forces, namely, increase or decrease of de- 
mand, supply, or cost of either goods or gold. From this it will be 
observed that the investigation of the causes of changes in prices 
is a very complex affair, not so easily disposed of as arguments of 
politicians on monetary problems would sometimes imply. During 
the period of falling prices from 1865 to 1896 one group of politicians 
based their arguments for an increase in money upon the assump- 



ELEMENTS OF ECONOMICS 149 

tion that all the causes of the fall in prices came from the money 
side of the ratio; but competent students of that period agree that 
the chief causes of the fall came from the goods side of the ratio, 
especially a decrease in the cost of production. We have already 
considered the forces affecting the value of goods, and, remember- 
ing that any force which changes the value of goods changes the 
general price level, we may proceed to the consideration of the forces 
coming from the money side of the ratio. 

We have seen that the law of satiety plays a vital part in de- 
termining the value of goods. If, for example, there is a large corn 
crop, producers and dealers voluntarily lower their prices, know- 
ing that they must do so, or, as a result of the law of satiety, rivals 
will lower prices and supply the market, leaving those who fail to 
lower prices with their corn on their hands which they cannot sell 
at all or only at greatly reduced prices. But gold or any other com- 
modity used as money is not subj-ect to the law of satiety, because 
it does not satisfy one want only but is a means of satisfying all 
wants. This may appear inconsistent with the principle that for the 
individual, money, representing general wealth, may be subject to 
the law of variation of utility, since the richer one gets the less 
he may care for additional wealth. Society, however, is not com- 
posed exclusively of such individuals but chiefly of those struggling 
to increase their fortunes; and it remains true that for society as a 
whole money does not obey the law of satiety. Hence it follows 
that producers of gold would not voluntarily offer more of it in ex- 
change for goods, either in case of an increased supply or lower 
cost, because no producer would have any fears about having gold 
left on his hands which he could not dispose of at the accustomed 
rate. Nor would dealers in goods take into account the lower cost 
of gold nor the increase in the amount produced. The business world 
thinks of money as something which in itself does not change in 
value, or only so slowly that no attention need be paid to it in busi- 
ness transactions. And the belief that the value of money changes 



150 ELEMENTS OF ECONOMICS 

slowly is true, as shown by experience, and this fact would show that 
changes in quantity or cost of gold do not affect its value in the same 
manner as changes in supply or cost affect the value of anything 
else. Any material change in the cost or prospective supply of an 
ordinary commodity is immediately known by the business world 
and prices would change within a few hours. 

But it is known and acknowledged by all that a fall in the cost 
of producing gold results in a rise of prices, or a fall in the value 
of gold, whichever way one chooses to look at it. The explana- 
tion generally accepted by economists is that the lower cost of 
producing gold results in an increase in its quantity and that this 
results in an increased demand for goods. Producers and dealers 
observe the increased demand for goods and raise the prices of 
their goods. Not all goods would at once begin to rise, but only 
such as miners would use in increased quantities. Gradually, how- 
ever, increase in demand would reach other goods, and prices gen- 
erally would rise. In case the law of diminishing returns applies, 
the increased production of goods that would follow the increased 
demand would increase the marginal cost, and prices would remain 
permanently higher. The increase in prices would lessen the profits 
of mine owners and production at the poorer or marginal mines would 
be checked until they paid the ordinary rate of profits, and thus 
equilibrium between the cost of goods and the cost of gold would 
be established and these new costs would permanently determine 
the new price level. 

In case it should become known that gold would soon become 
as plentiful, say, as iron, the valuation process would be different 
from that described above. In such a case the value of gold would 
drop immediately and prices, reckoned in gold, would consequently 
rise at once. But so long as no such revolutionary change is 
expected, men go about their business as though there were no 
such thing as a change in the marginal cost of gold or an increase 
in its quantity. 



ELEMENTS OF ECONOMICS 151 

93. THE EFFECTS OF CREDIT ON PRICES. The effects of 
credit on prices are matters of controversy among economists, but 
the view herein presented seems to be the one gaining ground. The 
temporary increase in credit will raise prices, if the incr-ease is rapid, 
because of the increased demand for goods. An increase in credit 
is due to the expansion of business, which means that men are buy- 
ing more goods than usual. The effects of a sudden increase in 
credit are seen most clearly when business revives after a period of 
industrial depression. When business begins to revive, factories that 
have been idle or running on short time are run to their full capacity, 
and more materials are needed. The price of iron, which is so ex- 
tensively used in modern industry, often rises 20 or 30 per cent in 
a few weeks during a "boom" period. 

Permanently, however, the increase in credit does not raise prices. 
The increase in credit not only means an increase in the demand for 
goods, but it also causes an increased production of goods. The 
factories that suddenly start up soon begin to turn out an increased 
quantity of goods to meet the new demand. The only reason why 
prices rise with the increase in credit is because demand for goods 
temporarily runs ahead of the supply. Consequently, if the increase 
in credit were gradual and evenly spread over all industries there 
would be no increase in prices, even temporarily, because demand 
and supply would be equalized all around. It would be like a gen- 
eral increase in barter, which certainly would not raise prices. For 
similar reasons a sudden increase of credit in certain industries 
sets in motion the productive force of the country and the initial 
increase in demand for goods is met by an increased supply, which 
brings prices down to their normal level. 

Indirectly, the gradual increase of credit as a substitute for 
money prevents prices from falling. Suppose during the next twenty 
years the volume of the world's business should double, and that the 
volume of money and credit or the rapidity of circulation should not 
increase. The result would be the fall in prices or the rise in the 



152 ELEMENTS OF ECONOMICS 

value in gold, because of the increased demand for gold. The situa-^ 
tion would be similar to that of Europe during the Middle Ages. 
During the Dark Ages the gold and silver mines of the world were 
closed and the supply of the precious metals ran very low. With 
the increased volume of commercial transactions during the Middle 
Ages prices went down so low that they seem to us ridiculous. In 
1050, a cow sold for about $1.50, a sheep for 30 cents, a hog for 50 
cents, and wheat for five cents a bush-el. If, however, the increase 
in business were accompanied by an increas-e in credit, no increased 
demand for gold would result, and prices, instead of falling, would 
remain the same. Briefly we may summarize the results of an in- 
crease in credit. A sudden increase in credit will increase prices 
temporarily because demand for goods runs ahead of the supply; 
but increased production soon brings prices down to their normal 
level, so that over long periods of time an increase in credit does 
not raise prices; the negative permanent affect of an increase in 
credit is to keep prices from falling by preventing an increased de- 
mand for gold. 

94. LAW OF VALUE OF MONEY. We may now summarize the 
results of the last two sections and state the general law of the 
value of money. The value of money depends upon the relative 
marginal costs of producing gold and goods and upon the demand 
and supply both of gold and of goods, marginal costs being the 
permanent forces; credit directly affects prices only temporarily, 
the only permanent effect being negative, that is, to keep prices 
from falling. 

It is usually laid down as a law by the older economists that, 
other things remaining the same, the rise in prices is in propor- 
tion to the increase in money, and many modern economists hold 
the same view. Thus, as a recent writer says, "Double the quantity 
of money, and, other things being equal, prices will be twice as high 
as before and the value of money one half." In explanation of this 
phenomenon he says, "The demand for money, in any given com- 



ELEMENTS OF ECONOMICS 153- 

munity at any given time, is constant. It is not subject to change 
because of the greater or less range of prices. Whether goods sell 
for less or more, all of them will still be sold, and will still 
be offered for money." In the first place, the "other things" referred 
to will not remain equal, for doubling the amount of money would 
bring such important changes that this law, if true, has no practical 
value. Rapidity of circulation, among other things, would not remain^ 
the same. Moreover, this explanation is purely mechanical and over- 
looks the essential details of the price-making process. If twice 
as much money should be put into circulation there would be twice 
as great a demand for goods, for, it is to be observed, not only will 
all the goods be offered for money, as this same writer says, but 
all the money will be offered for goods, or as he says, "It is sought 
in order to be spent." It hardly requires proof to show that doubling 
the demand for goods will not result in doubling prices. If th-e de- 
mand is for goods subject to the law of diminishing returns, prices 
would be much more than doubled. Doubling the amount of money 
would vitally affect the laws of production, and the results would 
be very complex, the prices of some things rising a great deal and 
the prices of others being affected but little. 

95. CHANGES IN PRICES SINCE 1870. From the close of 
the Civil War to about 1896 the general tendency of prices was down- 
ward, owing to various causes, chief among which were (1) the 
lower cost of production of manufactured goods, resulting from im- 
proved processes, (2) the opening up of new agricultural regions, 
(3) the lower cost of transportation, both by land and sea, and (4) 
the closing of the mints of many countries to the free coinage of 
silver. During that period our western plains were settled and their 
products thrown upon the market, and at the same time Russia and 
the South American countries were sending new suppli-es to the 
European market. During this period the Greenback party had its 
birth, and also the free-silver party, both movements being demands 
for an increase in the currency with the hope of preventing the fall 



154 ELEMENTS OF ECONOMICS 

in prices. But in the midst of the free-silver campaign of 1896 
prices began to rise and they have been going up ever since. 

The extent of the rise in prices between 1896 and the outbreak of 
the European War in 1913 has been variously -estimated, some price 
tables showing a rise of about 45 per cent, others of more than 50 
per cent. A price table properly weighted and including only com- 
modities consumed by the working classes would show a rise of more 
than 50 per cent, possibly 75 per cent. The advance in prices has 
been world-wide and has affected most commodities, though the rise 
has been most marked for agricultural products and certain "trust" 
made goods. Among the causes of the great increase in prices, three 
are especially important, the increase in the supply of gold, the law 
of diminishing returns in agriculture, and the growth of monopolies. 

From the discovery of America to 1850 the total amount of gold 
produced in the world is estimated at $3,314,000,000. With the dis- 
covery of gold in California and Australia in 1849 production sudden- 
ly increased, reaching a total of $3,310,000,000 by 1875, or as much in 
twenty-five years as during the previous three hundred and fifty- 
eight years. During the next twenty-five years production increased 
slightly, reaching $3,800,000,000 for the period. Since 1900 the pro- 
duction of gold has advanced with leaps and bounds, the total for the 
years 1901-1914 being about $5,500,000,000. During the years 
1907-1914 the world has produced more gold than during any period 
of twenty-five years previous to 1900, and the annual output has 
been three times as great as during the twenty-five years before that 
date. Such an enormous increase in gold would naturally cause a 
great rise in prices. 

The fact that agricultural products have increased in a marked 
degree shows that a second cause for the rise in prices is the law of 
diminishing returns. The population of the world has been increasing 
rapidly and the free lands of the New World have been settled, and 
consequently an increasing supply must come to a considerable ex- 
tent from poorer lands or those more distant from market. A third 



ELEMENTS OF ECONOMICS 155 

cause for the rise in prices has been the growth of monopolies. An 
increasing number of articles are produced under monopolistic con- 
ditions, as previously noted. 

The evils resulting from this rise in prices are apparent. It 
means that the masses of the people find it harder to make a living. 
The annuitant finds his dollars growing less and less valuable, with 
no increase in their number. The wage earner is also suffering. Ac- 
curate statistics are wanting here, but the most reliable authorities 
estimate that the wages of skilled labor, backed up by strong unions, 
have advanced in about the same proportion as prices; but wages of 
unskilled labor have advanced little or none at all, and these un- 
fortunate classes are sinking deep-er into poverty. 

From the nature of the causes of the rise in prices, only one can 
directly be removed, namely, the growth of monopolies, and it seems 
doubtful if this growth can be stopped, though monopoly prices might 
be regulated. Society as a whole must confine itself to (1) seeking 
means of offsetting the law of diminishing returns, such as scientific 
agriculture and a better organization of marketing, (2) devising 
means of readjusting the distributive process, such as the minimum 
wage, or adopting Socialism, which the radicals desire, and (3) a 
general elevation of the masses to a higher plane of intelligence, 
that each may be a better producer, a more rational consumer, and 
wise enough not to undertake the support of a family until he has a 
sufficient income. 

96. THE TERRITORIAL DISTRIBUTION OF GOLD. The sec- 
ond law of money is that gold flows to those countries where its value 
is greatest, or where prices are lowest. Suppose Australia increases 
her output of gold. Prices would tend to rise in Australia above the 
level in other countries because of the increased demand for goods. 
The rise in prices in Australia would cause an increase in imports, 
since merchants would naturally buy where prices are lower. In 
case certain goods were not produced at all in Australia, the increase 
in gold would simply mean an increased demand for imports and more 



156 ELEMENTS OF ECONOMICS 

goods would be shipped in regardless of a rise in price, or more 
strictly speaking, the rise in prices in foreign countries might take 
place before any gold would be sent to foreign countries. This would 
b-e true because the gold itself would not at first be shipped, but the 
goods would be ordered and paid for by bank drafts, hence the actual 
flow of gold would take place after the goods began to flow to Aus- 
tralia, and presumably after prices began to rise abroad. But it 
would still remain true that gold flows to those countries wbere it is 
of most value. 

This law would inform us that any attempt to raise the prices of 
one country to any great extent above the world level by increasing 
the currency would be futile. Suppose, for example, the United 
States should attempt to raise prices by an increase in silver as under 
the Sherman Act of 1890, when we were buying silver and thrusting 
it into circulation at the rate of about fifty millions of dollars a year. 
The rise in prices in this country would increase imports over exports 
and the balance would be paid in money, thus draining off our extra 
supply of money. Each nation will have its proportionate share of 
the world's money, determined by the volume of its business and its 
machinery of exchange, and any attempt of one nation to attract 
more than that amount will be nullified by the natural laws of trade. 

97. GRE SHAM'S LAW. The third law of money is called Gresh- 
am's Law, from the finance minister of Queen Elizabeth, who seems 
to have been the first to formulate the law. This law is that bad 
money drives out an equivalent amount of good money. This is real- 
ly a particular phase of the law of territorial distribution. Bad 
money, in Gresham's law, is debased money, that is, money of less 
weight than that provided for by law, worn coins, coins not worth 
as bullion their face value as coins, such as our silver dollars, and 
paper money of all kinds, which may be good in the country where 
issued but do not pass current in other countries. 

There are three ways by which the bad money drives out the 
good, the melting pot, hoarding of the good money, and by exporting 



ELEMENTS OF ECONOMICS 157 

the good money. By the first process, goldsmiths pick out brand 
new coins if they wish to use the gold in them. By the second way, 
those with the good money, say gold, would hoard it in case any 
inflation of the currency were anticipated, hoping that when most 
of the gold is driven out or hoarded it will command a premium, 
since importers of goods must pay in gold. The third process comes 
through the rise in prices caused by the increase in the currency, and 
since the bad money will not be accepted at its face value in foreign 
countries, the gold is sent to pay balances. 

The three laws of money are very closely related, and that rela- 
tionship may be shown thus: Taking our illustration of Australia in- 
creasing her gold supply, the first general result is a rise in prices 
in Australia, which brings into operation the law of territorial dis- 
tribution, the gold flowing out to pay balances due foreign countries, 
and the good money goes rather than the bad. 



158 ELEMENTS OF ECONOMICS 

CHAPTER XI. 

Problems of Money and Banking. 

98. THE THREE PROBLEMS. There are several problems of 
money and banking, but three are of special importance, namely, what 
the standard of value shall be, the problem of government paper, in-^ 
volving several questions, and how banks shall be organized. In 
connection with the first problem is the controversy over bimetal- 
lism, that is, whether we should have gold as the single standard 
of value or both gold and silver. The commodity standard has been 
advocated by some economists as more just than either the gold 
standard or the double standard. Many people have advocated gov- 
ernment paper as the best money, and the adherents of this idea 
have been numerous enough in the United States to form a strong 
political party which for a time seemed destined to rival the two 
great parties then existing. These two problems seem to diminish 
in importance, since bimetallism and greenbackism are at the present 
time dead issues. Both involve such important consequences, how- 
ever, that it seems best to explain them briefly. Moreover, all citi- 
zens should know the principles involved, for until the people have 
sound views on these matters there is always danger that these 
vexing questions may rise at any time in the future. 

The third problem is that of the organization of our banking 
system. The three main ends to be attained are, (1) that the banks 
shall be so organized as to serve all the people, and not merely those 
in the cities, (2) that they shall be safe, so that depositors and note- 
holders do not lose by the failure of banks and, in a broader way, 
that the banks do not help bring on general crises and that they may 
be able to prevent the spread of crises if started by other agencies, 
and (3) that bank credit, both the check currency and the note cur- 
rency, be elastic, that is, expand in volume when business expands 
and contract when business contracts. This is a difficult and com- 
plex problem. Its solution raises the question as to the relative 



ELEMENTS OF ECONOMICS 159 

merits of the different banking systems of the world. The main 
systems are (1) a great national monopoly, like the Bank of England, 
or France, or Germany, the parent bank having many branches, with 
rival private banks, (2) several groups of great banks, each with 
many branches, like the Canadian system, and (3) numerous small, 
independent banks, the system that we had in the United States be- 
fore the Federal Reserve Act of 1913. This is one of the most im- 
portant problems of modern industry, involving, as it does, the gen- 
eral prosperity of the country, for banks are so vitally bound up with 
modern industry that a poor system of banks not only hinders the 
normal development of business enterprises but may bring on severe 
industrial crises, plunging millions into temporary poverty and star- 
vation. 

99. THE STANDARD. The two main things to secure in select- 
ing a standard are that it be stable in value over considerable periods- 
of time and that it be accepted as the standard by all nations. A 
standard that is unstable in value, say over periods of ten or twenty 
years, or even thirty or forty years, works a hardship upon annu- 
itants, or else unduly enhances their income and injures either debt-, 
ors or creditors, owing to whether the value of the standard rises 
or falls. In the second place, if the standard is not accepted by the 
people of all nations, international trade is hampered. If the United 
States had silver as a standard and European nations had gold, the 
payment of balances either way would always cause trouble, because 
neither side would have the money the other side desires. 

The welfare of the debtor class has always held a prominent place 
in all controversies regarding the standard. The advocates of green- 
backism and bimetallism, for example, assumed that the debtor class 
was composed of poor people who were being unjustly treated by the 
rich because prices were falling, and it was further assumed that it 
was the duty of society to safeguard the interests of the debtor class 
by preventing a fall in prices. It is true that many farmers were, 
not many years ago, struggling to pay off mortgages, and in a sense 



160 ELEMENTS OF ECONOMICS 

might have been call-ed poor debtors, but in modern industry the 
vast majority of debts are owed by rich corporations to their bond- 
holders, most of whom are not rich, but people in moderate circum- 
stances, and including some working classes, widows and orphans. 
It is further assumed that the creditor should receive in payment of 
his debt a sum of money just sufficient to purchase an amount of 
goods equal to the amount the money would buy when borrowed. But 
what if prices are falling because of cheaper processes of production? 
In that case, to pay back the debt in goods, equal in quantity to what 
the money would buy when borrowed, would give the debtor all the 
advantage resulting to society from cheapening processes of pro- 
duction. Thus, if the debtor borrows $100 when wheat is one dollar 
a bushel and then pays back 100 bushels of wheat when the price 
has fallen to fifty cents a bushel, because of better methods of pro- 
ducing wheat, the debtor gains and the creditor loses all the benefit. 
That raises the question as to which class, if any, is due th-e im- 
provements in production. Until it can be proved that either the 
debtor class or the creditor class has exclusively given to society 
•these improved processes of production, we are not warranted in un- 
dertaking to legislate for the -exclusive benefit of either class. All 
that society is justified in ^ doing is to adopt a reasonably stable 
standard. 

100. THE COMMODITY STANDARD. Some writers believe 
that the commodity standard is the most satisfactory for deferred 
payments. But the commodity standard in practice would be less 
stable than gold, because it is not possible to include all articles. 
Only a few staple articles would be chosen to make up the standard, 
and the great staple articles are the ones most likely to be affected 
by new inventions which will lower their cost of production. The 
commodity standard would not displace gold for ordinary trans- 
actions and gold would be the actual medium passed in payment of 
debts. Prices of articles in the table would be noted when the debt 
was contracted and again at maturity, and a sum of money paid 



ELEMENTS OF ECONOMICS 161 

sufficient to buy the same quantity of goods as the money would 
buy when borrowed. It will be seen, therefore, that the commodity 
standard would be unstable owing to changes in processes of pro- 
duction, but the change would be upward when gold is going down, 
and vice versa; hence, either the debtor or creditor gains all the 
advantages, owing to whether the cost of producing goods is going 
up or down. On the whole, therefore, the commodity standard would 
be less stable than gold and no more just between debtors and 
creditors. 

101. BIMETALLISM. Bimetallism means the unlimited or un- 
restricted coinage of both gold and silver, at a fixed ratio; and that 
both metals be treated as the standard and made legal tender. In 
the late political struggle over bimetallism the legal ratio proposed 
was 16 to 1, the present ratio. This means that the government was 
to coin at that ratio all the gold and silver anyone saw fit to bring 
to the mints. ,^ 

The causes of the struggle were falling prices, the fall in the 
value of silver as compared with gold, and a large debtor class among 
the western farmers who had mortgaged their farms to get money to 
improve and stock them. The fall in prices from 1873 to 1896 made it 
harder for farmers to pay their debts, since their money incomes 
were shrinking while their debts remained the same. The free 
coinage of silver had been suspended by the act of 1873, and about 
the same time the mints of the chief European countries were closed 
to the free coinage of silver. , These events, it was urged, caused the 
volume of the world's money to shrink and prices to fall. This closing 
of the mints of the world to silver, just at a time when new and richer 
mines were discovered, also caused the value of silver to fall. In 
1873 the relative values were about 16 to 1, but silver rapidly dropped 
to about 18 to 1 by 1878. 

Both the debtors and the silver-mine owners desired free coinage 
of silver at 16 to 1, the farmers desiring it to raise prices in gen- 



162 ELEMENTS OF ECONOMICS 

eral and mine owners to keep up the price of silver. Congressmen 
representing these two interests attempted to get a law passed for 
the free coinage of silver. A majority did not favor the measure but 
a compromise was reached in the Bland-Allison Act of 1878. That 
act provided for the purchase by the government of not more than 
four million dollars' worth, and not less than two million dollars' 
worth, of silver bullion per month for coinage into silver dollars. 
Under this act about thirty million dollars' worth of silver or silver 
certificates were thrust into circulation each year until 1890. The 
Sherman silver purchase act of that year increased the annual addi- 
tion to the currency to about fifty million dollars, chiefly in treasury 
notes. This increase in the currency brought into play both the 
law of territorial distribution of gold and Gresham's law, and gold 
began to flow out of the country so fast that bank reserves and the 
gold in the United States Treasury began to run low and the busi- 
ness world began to fear that the gold would all leave the country, 
and a money panic resulted. To check the outflow of gold, the Sher- 
man Act was repealed in 189S. But general prices and the price of 
silver were still falling and debtors and mine owners kept up the fight 
for free silver, resulting in the political struggle in 1896. The peo- 
ple decided against free silver, and in 1900 Congress made gold the 
sole standard, and the continued rise in prices since 1896 has made 
free silver a dead issue. 

The arguments of the bimetallists, very briefly stated, were as 
follows: The fall in prices was due to a decrease in the supply of 
money and it was only just to debtors to restore silver to its former 
place in our monetary system, so as to prevent the fall in prices. 
The most general argument was that the use of the two metals made 
a more stable standard, first because both together made a larger 
volume of existing money and consequently more stable, since fluctu- 
ations in the annual output of the mines would affect its value less 
than a small supply would be affected, and secondly because a great 
incirease in the supply of one metal usually came just when the out- 



ELEMENTS OF ECONOMICS 163 

put of the oth-er was falling off. As to the first point, it seems that 
closing the mints of the world to silver must have caused a fall in 
prices, because the world's business was rapidly increasing and gold 
was increasing slowly. But the use of gold was being economized 
by the extension of credit, which would offset to some extent the 
fall in prices. The main cause, however, for the fall in prices dur- 
ing the years 1873 to 1896, was the fall in the cost of production of 
goods, as previously noted. The first part of the second argument 
seems true. The second part holds true for all periods in the history 
of gold and silver since 1492, except the period since about 1890. 
Since that date the annual production of gold has doubled and silver 
increased only about one-third. Under the stimulus of free coinage 
it is hard to say how much silver would have been produced. Hence, 
the last argument of the bimetallist breaks down. 

102. GOVERNMENT PAPER. The second group of problems 
is concerned with government paper. It has been urged by a good 
many people, enough in fact to form a large political party, (1) that 
government paper is the best money because it is the cheapest, (2) 
that the government and not private individuals, as banks, should 
supply the country with currency, (3) that it is safe, and (4) it is 
convenient. 

Government paper may be Cheaper to society than^ the precious 
metals, because it costs little to make it. But gold is used chiefly 
as bank and government reserves behind paper currency, and being 
handled little is not worn out rapidly. But government paper is no 
cheaper to society than bank paper. Nor is government paper any 
more convenient than bank notes, and for the wholesale trade not as 
convenient as bank checks. The two main questions are those con- 
cerned with the safety of government paper and, most important of 
all, with the substitution of government paper for bank paper. 

History abundantly proves that government paper is not as safe 
as bank paper. In times of urgent need, as in case of a war, it is too 
easy to set the printing press at work running off paper money, and 



164 ELEMENTS OF ECONOMICS 

legislatures prefer that method of raising revenue to that of in- 
creased taxation. With the inflation of the currency metallic money 
is driven out and the par of exchange with other nations is broken, 
the country being placed on a paper basis. Moreover, the value of 
the paper fluctuates violently with the changing prospects of a re- 
turn to a sound metallic basis, to the very great injury of business. 
On the other hand, the government is not inclined to allow banks to 
be lax about meeting their demand liabilities, because the government 
has nothing to gain by that policy. The government is more apt, 
therefore, to require the banks to make their paper currency safe 
by redeeming it on demand than it is to provide for the redemption, 
on demand, of its own paper currency. By the terms of the law of 
1900 Congress has provided for the redemption of its paper currency 
by requiring the Secretary of the Treasury to keep on hand $150,000,- 
000 in gold as a reserve fund. But under urgent conditions this law 
might easily be repealed. 

The demand that government paper shall take the place of bank 
paper scarcely deserves serious consideration. Government paper 
serves merely as a medium of exchange in the retail trade. It does 
not perform the functions of bank paper, which not only serves as a 
medium of exchange but also is an agent in production. If a business 
man desires a loan to expand his business, government paper does 
not help him, as the bank does. The government puts its paper into 
circulation, not by loaning it, but by paying its debts. 

103. THE FUNCTIONS OF BANKS. Banks perform two great 
functions; they borrow money and loan their credit. What a bank bor- 
rows is usually termed deposits, which consist of actual cash deposited 
and deposits resulting from discounting commercial paper, the latter 
constituting the chief portion of deposits. If a bank receives on de- 
posit the proceeds of a discount operation the bank really borrows of 
the depositor, though no actual money is put into the bank. But the 
depositor has a right to draw his deposits out of the bank in the 



ELEMENTS OF ECONOMICS 165 

form of money. Depositing the proceeds of discount operations, 
therefore, does not increase the money in the bank but prevents the 
decrease in the cash reserves. Hence, the bank is practically borrow- 
ing money of the depositor. What the banks loan is their own credit, 
either in the form of bank notes or bank checks, the latter being 
based upon the desposit account. Banks might loan actual money, 
but the vast majority of their loans consists of bank credit. 

Let us take a typical case to see how the functions of a bank are 
brought into play and how bank notes and checks are put into circu- 
lation. If a manufacturer wishes to expand his business he may need 
to enlarge his plant, and to do so wishes to borrow of the bank. He 
gives the bank his promisory note, or the note of some other person 
due him in the future, which the bank discounts and gives the bor- 
rower the proceeds either in bank notes or a deposit account against 
which checks may be issued, or the borrower may take part of the 
proceeds in notes and deposit the remainder. In this simple trans- 
action lie all the mysteries of the banking functions, which seem so 
puzzling to beginners, but which are easily understood if this example 
is studied with care. 

From this example the two great services of banks to the com- 
munity are seen. In the first place, bank credit aids in production 
in a very peculiar way. Suppose no such thing as credit were known. 
The manufacturer referred to above could not expand his business 
immediately unless he had actual money. If he had not, he would 
have to wait maybe several years before he could save enough to in- 
crease the size of his factory. If banks loaned actual money he 
could immediately begin the addition of his plant. If banks loaned 
their credit, they could loan much more. Thus credit is a means of 
coining property into purchasing power without selling the property, 
as it is merely pledged as security to the bank. Credit, therefore, 
quickens the process of production, enabling industry to expand 
rapidly, in a way that even money cannot do. The error of supposing 
that government paper can serve the function of bank paper is at 



166 ELEMENTS OF ECONOMICS 

once apparent, unless the government loans to individuals and thus 
assumes the banking functions. Another look at our typical case will 
reveal the fact that bank currency is elastic. As business expands, 
the currency expands. If the cost of increasing the size of the fac- 
tory is $10,000, the notes or checks are issued to that amount. As 
each man desires to -expand his business, the volume of the currency 
automatically expands. As the volume of business contracts, the 
volume of the credit currency contracts. When the volume of busi- 
ness contracts, men do not borrow so much from the banks, and as 
their promissory notes to the banks fall due, bank notes and deposits 
are turned in as payment and automatically the note and deposit 
currency contracts. Neither metallic money nor government paper 
will thus expand and contract with the volume of business. 

Economists as a rule recognize three banking functions, deposit, 
discount, and note issue. But this classification is faulty, in that it 
conceals the real functions of banks, which are only two, borrowing 
money and lending credit. The deposit function is that of borrowing 
money, as noted above. If the proceeds of a discounted note are de- 
posited, the bank allows the depositor to use its credit as means of 
purchase, that is, the bank does not loan money but its credit. If 
bank notes are given instead of a deposit account, the bank loans its 
notes. In either case, the bank loans its promise to pay, or its credit. 
Discounting is not in itself a function, but is only an incidental oper- 
ation in loaning bank credit, the discounted note being the security 
for the loan. There are, however, some reasons for distinguishing be- 
tween the loaning of bank notes and the loaning of deposit or check 
currency, since the two forms of currency serve for different pur- 
poses, one for wholesale and the other for retail transactions. But 
in both cases the bank is loaning its credit, and the bank performs 
but two functions, borrowing money and loaning its credit. 

104. NEEDED CHARACTERISTICS OF BANKS. The three 
most vital characteristics needed in a banking system are (1) the 
ability to serve all the legitimate banking needs of all people in all 



ELEMENTS OF ECONOMICS 167 

sections of the country, at reasonable rates of interest, (2) stability, 
and (3) elasticity of its currency. In order to fulfill the first re- 
quirement, there must be banking institutions in the smaller cities 
and within the reach of rural communities, and the security upon 
which loans are made must be suited to the district. In order to 
meet the needs of the commercial centers, the personal note backed 
by property readily salable is required, while in a rural community 
land is often the only security that can be offered. Land, however, 
is not readily salable and is not good security for a commercial bank 
which may need quickly to dispose of the property should it come in- 
to its possession, because sudden reverses are more liable to over- 
take a commercial community than a rural community. City banks, 
therefore, should loan only on "bankable" property as security and 
for a short period of time, while country banks should be allowed to 
accept real estate as security and loans should be allowed to run sev- 
eral years, since farmers often borrow to make improvements, and 
several years are often required in which to make payment. In or- 
der to secure reasonable rates there must be healthful competition 
among banks or effective regulation by the government. 

There is special need for banks to be strong and stable. In 
these modern days of interrelationships among business men, the 
failure of any business may injure or ruin other firms. But this is 
especially true of banks, for they deal in credit, which is a very del- 
icate thing. A very large part of modern business is done on credit 
and banks are not supposed to keep a cash reserve of more than 15 
to 25 per cent of their outstanding demand liabilities, consisting 
mainly of notes and checks, because ordinarily people do not demand 
money for notes or checks received, but deposit them. Suppose a 
large business establishment fails. Its failure may ruin some local bank 
that has loaned the firm large amounts. This bank failure spreads 
alarm among depositors in other banks in the community, and there 
is a "run" on the banks, that is, depositors and note holders, if notes 
are not especially secured by the government, desire to get their 



168 ELEMENTS OF ECONOMICS 

money out of the bank. The banks cannot pay all their demand liabil- 
ities at once, though the commercial paper they own may be perfectly 
good and the banks may be in a sound condition. But by law if a 
bank cannot pay its demand liabilities on demand it must close its 
doors to business and the bank has "failed" in the eyes of the law 
and of the public. The closing of the banks in one locality may 
ispread the fear throughout the country and the "run" on the banks 
may become general, accompanied with the same results as in the 
original locality. The closing of the banks, even temporarily, injures 
industry, because it deprives the community of its accustomed means 
of transacting business, and some men might even be ruined. Thus 
the sudden collapse of credit may cause widespread panic which is 
followed by industrial depression. If business generally has been 
conducted on a sound basis and the panic is largely fear on the part 
of depositors, the whole phenomenon may run its course in a few 
weeks. But if business has not been sound, industrial depression may 
last several years. In the great crisis of 1837, for example, there 
was a large amount of speculation and overbuilding of roads and can- 
als. People borrowed of the banks to get funds for their speculative 
ventures which did not pay dividends, banks could not collect from 
■^leir creditors, and banks and business firms failed all over the 
country. In this case the collapse of credit was not the result of 
mere fright on the part of depositors, and it took four or five years 
for industry to recover from the shock. The banks were to blame for 
this disaster in so far as they encouraged speculative business by 
granting loans for such enterprises. Banks should be safe in the 
sense that they should loan only for healthful industrial development 
and they should be strong enough to resist a panic that starts from 
mere fear of depositors, or better still, so strong that depositors have 
no fear of bank failures becoming general in case a few go under. 

In the third place bank currency should be elastic. In the fall of 
the year farmers and grain dealers in the West need an extra amount 
of currency to move the crops and pay help. This calls for bank 



ELEMENTS OF ECONOMICS 169 

notes, mostly, owing to the business habits of the community. Far- 
mers and their hired help both prefer "money" to checks, and notes 
are accepted as money. In the great commercial centers the currency 
needs to be elastic, for such centers have their periods of comparative 
briskness and succeeding calm. During the first part of January, for 
example, large sums are needed for payments of dividends and other 
annual settlements. 

105. DEFECTS IN OUR BANKING SYSTEM PREVIOUS TO 
1913. Previous to the passing of the Federal Reserve Act of 1913, 
our banking system lacked all three of the characteristics considered 
above and besides had several other defects. Andrew Carnegie once 
called it the worst banking system in the world. The national banks 
could be of little service to rural communities, because they could not 
loan on real estate. Most of the state banks were also commercial 
hanks. The farming community was not properly served, and what 
loans they were able to secure were at prohibitive rates. 

Banks were not safe and stable. There were over 30,000 banking 
institutions in the country, small and independent of each other. The 
failure of a large firm might pull down several banks, and then the 
panic would spread. There was little cooperation at such times, each 
bank struggling to keep its reserves. Hence the reserves of the 
country were scattered and immobile, instead of being centralized 
and under the control of a single authority that could send th-em 
where needed and thus check a crisis. If reserves could be sent 
quickly to any point of danger, fear of depositors would be allayed, 
for when people find they can get their money they do not want it. 
Another source of danger to the banks was the close connection be- 
tween the eastern banks and Wall Street, the main center of specu- 
lative operations in the country. Men who speculated in stocks and 
bonds borrowed of the banks and frequent failures of the speculators 
weakened the banks. 

The third great defect in our banking system was the inelastic- 
ity of credit. Note currency was inelastic because based upon bonds 



170 ELEMENTS OF ECONOMICS 

of the United States government. If a bank wished to issue notes it 
had to buy bonds equal in value to the amount of notes issued. This 
made the volume of note currency inelastic for three reasons. The 
amount of government bonds was a fixed quantity, the amount on the 
market was not enough to permit of much expansion, and even if 
bonds were to be had in abundance the banks did not wish to disturb 
their regular investments for a temporary increase in note circula- 
tion. The check currency was inelastic for several reasons. The re- 
quirements as to reserves were rigid and banks too often kept close 
to the minimum amount allowed, and in time of need they could not 
expand their credit and help business men whose financial needs 
were increased by business depression, as they ought to have done. If 
some depositors got frightened and drew out their deposits, that de- 
pleted the bank reserves and decreased the power of the banks to 
make new loans until restored by selling commercial paper, or stocks 
and bonds, or by the collection of debts due them. Generally in time 
of a panic commercial paper is not easily sold, and banks must wait 
until notes due them are paid. 

106. THE FEDERAL RESERVE ACT. In 1913 Congress 
passed the Federal Reserve Act, which was intended to correct two 
of the main evils in our banking system and to som*e extent to cor- 
rect the third defect. Before considering how the act proposed to 
remedy these defects it will be well to look at the general nature of 
the reorganization of the banking system. The act neither set up a 
great monopolistic, unified system like the Bank of England nor did 
it leave the little banks independent of each other, as thej^ formerly 
were. Instead, it created a sort of federated system, with central 
control in certain matters by a government Federal Reserve Board. 
The act provided for the division of the whole continental area of the 
United States, exclusive of Alaska, into federal reserve districts, not 
less than -eight nor more than twelve, the number to be determined 
by the Federal Reserve Board. In each district is a federal reserve 
bank, with branches. The federal reserve banks are fairly large in- 



ELEMENTS OF ECONOMICS 171 



stitutions with a capital of not less than $4,000,000, and are mainly 
bankers' banks, as their business is mainly to be with member banks,^ 
and banks are the only stockholders having voting power. All 
national banks must become members of a federal reserve bank 
and other banks may become members. The federal reserve bank has 
power to open deposit accounts with member banks and with the 
United States, to deal in bills of exchange, and to issue federal re- 
serve notes to member banks, under the supervision of the Federal 
Reserve Board. 

This Federal Reserve Board is composed of seven members, the 
Secretary of the Treasury and the Comptroller of th-e Currency a&, 
members ex-officio, and five others appointed by the President of the 
Unit-ed States, by and with the advice and consent of the Senate. 
Each member of the Board receives a salary of $12,000 a year, and 
none is to be connected with any bank, either as officer or stock- 
holder, though at least two besides the members ex-officio are to be 
men with experience in banking or finance. The Board has power (1) 
to examine the federal res-erve banks and the member banks, (2) to 
allow or require federal reserve banks to re-discount the discounted 
paper of other federal reserve banks, at rates of interest to be. fixed 
by the Federal Reserve Board, (3) to suspend reserve requirements, (4) 
to exercise general supervision over the federal reserve banks, and 
(5) to issue notes to the federal reserve banks. 

This act also creates a federal advisory council consisting of one 
representative of each federal reserve bank. As the name implies, 
the council has only advisory powers, which are to confer with the 
Federal Reserve Board, and to make recommendations in regard to 
discount, rates, re-discounts, note issues and reserve conditions in the 
different districts. 

Thus the banks of each district are federated with the federal re- 
serve bank, and the Federal Reserve Board has general supervision 
over the whole system, advised and assisted by the council. This sys- 



172 ELEMENTS OF ECONOMICS 

tem leaves the member banks free to follow their ordinary course of 
business in their ordinary way, the federal reserve banks and the Fed- 
eral Eeserve Board checking them up in case they wish to extend their 
loans and assisting them in times of danger. The whole system 
roughly approaches the organization of our federal system of gov- 
ernment, and possesses some of its advantages, the local banks 
serving local needs, the federal reserve banks answering to the states, 
which look after larger affairs, and the Federal Reserve Board cor- 
responding to the national government, which looks after the needs 
of the whole countrv. 

107. SERVICE. The act only partially removes the first defect 
above noted in that it does not establish a thorough system of rural 
credit. National banks are permitted to make loans secured by farm 
lands, under certain restrictions. This feature of the act seemingly 
is intended as a temporary arrangement, and the whole subject of 
rural credit is yet to be acted upon by Congress. 

In a general way, however, the act contains several provisions 
designed to guard the general interests of the people. The fact that 
a federated system of small banks was created rather than a great 
monopoly will insure good service at least to all commercial inter- 
ests. Also the governmental control and oversight ought to insure 
good service. Actual banking operations and the business manage- 
ment is in the hands of the banks, the government only exercising 
general control. Thus efficiency and service seem to be secured. 

Reasonable rates would seem to be assured because of several 
features of the new system. The act did not create a monopoly but 
left the individual banks still independent to a large extent, and pre- 
sumably competition among the member banks will keep rates of 
interest at a reasonable level. The power of the federal reserve 
banks and of the Federal Reserve Board ought also to keep down 
rates of interest. In case of stringency in the money market the 
federal reserve banks can compete with the member banks through 
what the Act calls open-market operations. In its first report, issued 



ELEMENTS OF ECONOMICS 173 

January, 1915, the Federal Reserve Board says, "If, at any time, com- 
merce, industry or agriculture are, in the opinion of the Federal Re- 
serve Board, burdened unduly with excessive interest charges, it will 
be the clear and imperative duty of the Board acting through the 
discount rate and open-market powers to secure a wider diffusion 
of credit at reasonable rates/' 

108, SAFETY. Under the new system banks should be more 
safe, individually and collectively, than under the old system because 
of (1) the federal system, (2) the central control of reserves and 
note issue, (3) severing the connection with Wall Street, (4) govern- 
ment control, and (5) making the banks United States depositories. 
Banks are no longer wholly independent of each other. Especially in 
times of danger or when reserves of any bank are running low, it 
can borrow of the federal reserve bank of its district by re-discount- 
ing commercial paper and thus strengthen itself. The federal re- 
serve bank thus aids its members and at the same time limits their 
actions and also examines the soundness of the commercial paper 
re-discounted. By this means and the power of general oversight 
the whole system of banks within each district is tied together 
and made safe and strong. 

The Federal Reserve Board has general control of reserves and 
by requiring federal reserve banks to re-discount discounted paper 
of other federal reserve banks can cause reserves to flow from one 
district to another as they are needed. Thus reserves become mo- 
bile and the whole system of banks is stronger because there are no 
weak links in the chain. 

Connection with Wall Street is severed by the provision that 
allows the banks to discount commercial paper "arising out of actual 
commercial transactions" but prohibits the banks from discounting 
"notes, drafts, or bills covering merely investments or issued or 
drawn for the purpose of carrying or trading in stocks, bonds, or 
other investment securities, except bonds and notes of the Govern- 
ment of the United States." 



jL74 ELEMENTS OF ECONOMICS 

Government control should increase the safety of the whole 
jsystem since the Federal Reserve Board, assisted by the advisory 
council, is in a position to know the needs of the different parts of 
the country, and through its power of inspection and control of re- 
serves and note issue can prevent the spread of panics and to a 
considerable extent prevent them from starting. The whole system 
-will naturally give depositors more confidence in the safety of it 
and they will be less likely to start a "run" on the banks in case 
;any one bank should fail, which it is less likely to do than for- 
merly. The fact that the banks are made depositories of the United 
States government would tend to strengthen them because of the 
;more careful inspection this will lead to and because of the increased 
^confidence this will inspire among the people. 

In addition to all these provisions for the general safety oi 
the banks, the federal reserve notes are especially secured by sev- 
eral provisions. Banks must keep a gold reserve of 40 per cent of 
the value of notes issued. This requirement may be suspended tem- 
porarily by the Federal Reserve Board, which also increases general 
safety of business, because more aid can be extended to member 
banks if the need is urgent. The issue of notes is under the control 
of the Federal Reserve Board, which would check any tendency to 
over-issue. And, most important of all, the United States Treasury 
must redeem these notes on demand. These provisions make the 
new notes as good as gold. 

109. ELASTICITY OF CREDIT. The act makes bank credit 
.elastic. The federal reserve notes are based upon a gold reserve 
of 40 per cent of the note circulation and upon commercial paper, 
jand not upon government bonds. If a federal reserve bank desires 
notes, it deposits with the government agent at the bank approved 
securities equal in value to the amount of notes desired. If a mem- 
ber bank wishes notes to loan to its customers it sends to the federal 
j-eserve bank commercial paper for re-discount. Thus bank notes 



ELEMENTS OF ECONOMICS 175 

will automatically increase with the increase of business, and the 
only limits to the increase are the discretion of the Federal Re- 
serve Board and of the federal reserve banks, and the amount of 
gold reserve. The Federal Reserve Board may temporarily suspend 
the reserve requirements, the abuse of this privilege being prevented 
by a tax on the note circulation not backed by the gold reserve. 
Thus the expansibility of the note circulation is amply secured. 
To secure the contraction of the note circulation when business con- 
tracts, the act provides that no federal reserve bank shall pay out 
the notes of another bank, but shall promptly return for credit or 
redemption all such notes to the bank through which they were 
issued. 

Check currency is made more elastic by less rigid requirements 
as to reserves and by the mobility of the general reserve funds 
of the whole country. Under the old system, banks in the smaller 
cities were required to keep a reserve of 15 per cent of their de- 
posits and banks in the larger cities were required to keep a re- 
serve of 25 per cent, and no matter how urgent the circumstances 
these reserves had to be maintained. Under the new act the federal 
reserve banks must maintain reserves equal to 35 per cent of de- 
posits. Member banks in small cities must maintain a reserve of 
12 per cent of its deposits, banks in larger or "reserve" cities as 
they are called, must keep a reserve of 15 per cent and banks in 
"central reserve" cities, 18 per cent. In each case a member bank 
must keep a certain proportion of its reserves on deposit with the 
federal reserve bank. This centralizes the reserves to a great ex- 
tent, giving a large fund of gold in one bank, and enables the federal 
reserve bank to come to the assistance of any member bank in need. 
These requirements may be suspended temporarily by the Federal 
Reserve Board. Thus in times of financial stress, credit may be 
extended and the trouble relieved. Mobility of reserves within the 
federal reserve district is secured by the member banks securing 



176 ELEMENTS OF ECONOMICS 

more reserves when required by sending discounted paper to the 
federal reserve bank for re-discount; and mobility over the whole 
country is secured by the power of the Federal Reserve Board to 
require federal reserve banks to re-discount paper of other federal 
reserve banks. This mobility increases the elasticity of check cur- 
rency by sending reserves where they are wanted, and by check- 
ing the fears of the people, which formerly caused credit to con- 
tract when it ought to expand. 



ELEMENTS OF ECONOMICS 177 

CHAPTER XII. 

International Trade. 

110. THE LONG CONTROVERSY. The problem of interna- 
tional trade has been a political issue and a matter of controversy 
among great thinkers for over four hundred years, and we do not 
propose in this brief chapter to decide the question, but merely to 
enable the student to see what the controversy means and to set him 
to thinking for himself. There have been various phases of the con- 
troversy. From about 1500 to 1800 it concerned the Balance of Trade. 
During that period most nations acted upon the theory that trade 
ought to be so regulated that a great quantity of gold and silver 
should flow in. Each nation was trying to get a favorable balance of 
trade, as it was called, that is, it was trying to accumulate a great 
stock of gold by selling more goods than it bought. 

This theory was based on various misconceptions. In the first 
place money was looked upon as being the all-important form of 
wealth. It was not seen that whoever has any form of marketable 
wealth has the means of obtaining money. Another mistaken notion 
was the belief that trade was a one-sided affair, the seller getting 
the best of the bargain. The obvious truth was overlooked that the 
buyer gains as well as the seller, since he disposes of what he does 
not want and obtains what he does want. Clearer thinkers than 
those in control of governments finally overthrew the Balance of 
Trade idea, and now nations do not trouble themselves about regu- 
lating trade in such a way as to cause gold to flow into the country. 
The fact that for three centuries all civilized nations accepted and 
acted upon false theories should teach us a lesson, and that lesson 
is that the majority are not necessarily right. 

For over a century the dispute has been over the effects of a 
protective tariff. Most nations now act upon the theory that inter- 
national trade ought to be restricted in such a way as to build up 
certain industries that otherwise would not develop. In other words. 



178 ELEMENTS OF ECONOMICS 

a protective tariff seeks to encourage the development of the pro- 
tected industry by enabling producers to raise prices above the rates 
determined by free competition between home producers and 
foreign producers. But the mere fact that the majority believe one 
way or the other should have no weight whatever, since majorities 
in the past have been wrong and may be wrong now. Each person 
must approach the subject with open mind. 

111. ADVANTAGES OF INTERNATIONAL TRADE. The 
main advantage of international trade is that resulting from inter- 
national division of labor. Different countries have different nat- 
ural resources and different climatic conditions. Countries with fer- 
tile soil but poor in mineral resources will naturally turn their en- 
ergies to agriculture, countries with rich mineral resources but poor 
soil will develop manufacturing, while countries with various ad- 
vantages will have diversified industries. This will be the natural 
development if commerce is free among nations. Each nation will 
turn its main energies towards developing its best natural re- 
sources, export its surplus products of those industries and buy 
from other nations those things that it cannot produce at all or 
only at a great disadvantage. Thus each nation makes the best pos- 
sible use of its labor and capital. If a nation with poor mineral re- 
sources but rich soil should undertake to produce all its manufactured 
goods the energies of that nation would be wasted. By world-wide 
cooperation in satisfying human wants the whole world becomes 
richer. 

This beneficial result would be produced, not by any formal 
agreement among nations as to what each would produce, but by 
ordinary world competition in the world markets. The great staple 
articles of the world have a world price, which is roughly uniform 
in all countries, not counting cost of transportation. Each country 
will produce for export those things that bring the highest profits, 
at the prevailing world prices. The things that yield the most 



ELEMENTS OF ECONOMICS 179 

profits are those that can be produced cheapest, since profits are 
determined by selling price minus cost. 

Owing to the fact that labor and capital do not move from 
country to country with perfect freedom, rates of profit are differ- 
ent in different countries. This brings it about that a country might 
have a positive advantage over other countries in producing certain 
things and yet not produce those things but import them, since 
it might have a greater advantage over other countries in producing 
other things. Suppose a given unit of labor and capital in a given 
time could produce in England ten dollars' worth of wheat, or fif- 
teen dollars' worth of steel, and the same unit of labor and capital in 
the same time can produce in the United States twenty dollars' 
worth of wheat and eighteen dollars' worth of steel. Under these 
conditions the United States would make more profits than England 
by producing either wheat or steel. But it will make the most by pro- 
ducing wheat. Thus we arrive at the celebrated principle that in- 
ternational trade is based upon the relative advantages of produc- 
tion and not upon absolute advantages. In looking at relative ad- 
vantages the things compared are not merely the same things in 
different countries but also different things in the same coun- 
try. The American producer of steel, under the conditions stated, 
would make a higher rate of profits than the English producer; 
but the American producer of wheat would make still greater 
profits. Manifestly, American capital and labor would, under 
such circumstances, be set to producing wheat for export rather 
than steel. But this great principle of international trade is the same 
principle as that announced at the opening of this section, that the ad- 
vantage of international trade is that resulting from international di- 
vision of labor, each nation doing what nature has best fitted it to do. 

112. ECONOMIC EFFECTS OF PROTECTIVE TARIFFS. A 
protective tariff is a tax levied on imported goods in order to de- 
stroy or lessen competition between home producers and foreign 



180 ELEMENTS OF ECONOMICS 

producers. If the rate is high enough to shut out imports altogether, 
home producers could raise their prices high enough to yield the rate 
of profits prevailing in other industries, and if a monopoly should 
be formed prices would go even higher. If the rate is not high 
enough to exclude foreign goods, the importer will add the tariff 
to the price, and the increased price, if high enough, will invite 
capital into the protected industry. Thus in either case the in- 
creased price will make the protected industry profitable and it will 
be developed if the country has any aptitude for it. 

Now the most vital point in the whole controversy is the kind 
of industry that a protective tariff will develop. Will it develop in- 
dustries that naturally yield the most profits or those that yield 
the least profits? Will it, in other words, develop the industries for 
which nature has best fitted the country, or will it develop industries 
in which the country has least natural advantages? The whole 
controversy over protection hinges upon this point, and if the con- 
troversy is ever ended it will be when this point is settled one way 
or the other. The disputes over the effects of the tariff on wages 
and upon industry generally all depend upon this one great question. 

On this point the opponents of the protective principle claim 
that it is the industries that are naturally among the less profitable 
that are protected, that the tariff is to enable the less profitable in- 
dustries of the country to make as much as the most profitable, and 
not enable those making the highest profits to make still higher 
profits. Protectionist writers seem not to have considered this 
point at all, except in the case of the "young industries" argument, 
to be dealt with later. If this assertion of the anti-protectionists 
is true, that the tariff develops the less profitable industries, then 
it follows that a protective tariff diverts capital from its natural 
channels and makes the nation poorer, unless the tariff creates new 
capital and thus increases the total amount of the capital and in- 
dustry in that country. This possible result we will consider in a mo- 



ELEMENTS OF ECONOMICS 181 

ment. 

It may be urged that the tariff makes the protected industries 
as profitable as other industries. So it does make the protected in- 
dustries as profitable to those engaged in them, but not to the coun- 
try as a whole. The enhanced profits of the protected industries 
come from the increased prices, and the increase in prices lessens 
the profits of all other industries. If a tariff increases the price of 
steel, all who use steel pay the increased price and their profits are 
thereby lessened. Hence, it remains true that the country is devel- 
oping unprofitable industries and is poorer because of the protective 
tariff, unless the tariff creates new capital rather than diverts it 
from the more to the less profitable industries. 

The capital of a country can be increased only by increased sav- 
ing or by importing it from foreign countries. If the whole range 
of industries becomes less profitable by developing industries for 
which the country is not well fitted by nature, savings would not 
increase, but decrease, unless the tariff should have the curious 
result of compelling people to work harder or live more sparingly 
in order to save more capital. It is needless to say that no protec- 
tionist would claim such a result. Nor would foreign capital flow in 
more than ordinarily because of the tariff, if industry becomes less 
profitable. And in fact the foreign capital in this country seeks 
the non-protected industries, where a change of political parties at 
Washington cannot wipe out profits by a change in the tariff. It 
may seem obvious that when mills and factories spring up because 
of the tariff, the tariff has increased the total amount of capital 
and industry in the country. We can see these additional mills and 
factories but we can neither see nor estimate the capital that would 
have been in the more profitable industries had the tariff not di- 
verted it from its natural channels. On the whole, if the view of 
the anti-protectionists, that a protective tariff develops the indus- 
tries for which the country is not best fitted by nature, is true, it 



182 ELEMENTS OF ECONOMICS 

follows that the total amount of capital in the country is less than 
it would have been without the tariff and that industry as a whole 
is less productive and the country is made poorer and not richer. If 
this is the true result of protective tariffs it is high time that the 
people of this country should know it, that we as a nation may 
cease to waste our energies by developing unprofitable industries. 

113. THE YOUNG INDUSTRIES ARGUMENT. In the last 
topic we have been considering protection as a permanent thing. 
Economists and statesmen are generally agreed that it may be wise 
to protect certain industries temporarily. This is known as the 
theory of protection to young industries. Stated briefly, the theory 
is that if a country has natural facilities for certain industries, but 
artificial hindrances prevent their development, protection should 
be extended to those industries until they are able to prosper with- 
out protection. The artificial obstructions might be lack of skilled 
workers, lack of trade connections, competition of old and well es- 
tablished industries in other countries, and various temporary hin- 
drances incident to the starting of an industry. The temporary pro- 
tection of such industries might be compared with draining a 
swamp. It might be an expense to undertake it, but if the land is 
rich it will more than repay the cost; and if the industry developed 
is one naturally profitable, it will repay us for the high prices tem- 
porarily endured. If the industry is naturally profitable, competi- 
tion among home producers will bring down prices when the in- 
dustry is permanently established, unless a monopoly is formed. 

If the policy of protection to young industries is to be applied, 
it should be done judiciously. Great care should be used in selecting 
the industries to be protected and aid should be extended to none 
except those having natural facilities in their favor. Then the pro- 
tection should be withdrawn gradually when the industries are able 
to stand alone. Our method of applying protection has been far dif- 
ferent. Aid has been extended indiscriminately to all sorts of in- 



ELEMENTS OF ECONOMICS 183 



dustries, and aid once given haS not been withdrawn. The failure to 
withdraw protection after a reasonable time has been due partly to 
the influence of the "vested interests" in political affairs and partly 
to the belief in permanent protection. 

114. THE TARIFF AND WAGES. Protectionists argue that 
American labor should be protected against the cheap labor of other 
countries. The argument assumes that American producers 
cannot compete with foreign producers because of higher wages 
in this country. But since the non-protected industries in this coun- 
try pay the same rates of wages, for the same grade of labor, as the 
protected industries pay, the reason why the industry asking protec- 
tion cannot compete with foreign producers is not high wages but the 
lack of natural facilities. The non-protected industries can pay 
higher wages than their foreign competitors because those indus- 
tries are naturally profitable at prevailing world prices. 

Moreover, the effect of protective tariffs on wages cannot be 
considered apart from the general effect of such tariffs upon indus- 
try. We shall learn in a subsequent chapter that wages depend upon 
the relation between supply of and demand for labor, and the pro- 
ductivity of industry. The greater the productivity, demand and 
supply remaining the same, the higher the wages; and a great de- 
mand for labor, coming from the owners of capital, with a shortage 
in supply, makes wages high. Now, if a protective tariff does not 
increase capital or make it more productive, but has the opposite 
effect, a protective tariff does not increase wages but decreases 
wages. 

115. OTHER ARGUMENTS. There are several other arguments 
for or against a protective tariff, two of which find frequent ex- 
pression in current literature. One of these arguments relates to 
the diversification of industries which a protective tariff will bring 
about. With many different kinds of industries the people of a 
country are able to utilize their different tastes and talents, and 



184 ELEMENTS OF ECONOMICS 

the mational life will be fuller and richer. In a purely agricultural 
country, for example, people are backward and lack the opportuni- 
ties that come with a denser population and the existence of large 
cities. But it is urged on the other hand that if there is any eco- 
nomic advantage in such diversification of industries, the tariff is not 
needed to develop them, since the natural advantages would result in 
greater profits, which would be sufficient incentive for starting new 
industries. 

The home market argument also still persi-sts in the popular 
press. This argument assumes that to transport goods long dis- 
tances is an economic waste and that a market at home is better 
and more secure than a market abroad. But if it did not pay to 
transport goods long distances they certainly would not be trans- 
ported. Moreover, a home market is no more secure than a foreign 
market except in case of war, for the demands of other people are 
as persistent as the demands of the American people. 

116. THE PRESENT TARIFF. The existing tariff, passed in 
1913, is the first since the Civil War to revise rates downward. The 
average rate was lowered about twenty-five per cent. But the full 
significance of the new tariff is not revealed by the change in the 
average rate. About one hundred articles, largely necessities, were 
put on the free list, about seventy were taken from the free list, in- 
cluding many luxuries, and other luxuries were taxed at a higher 
rate. On the free list are such articles as meats, cattle, wool, flour, 
potatoes, boots and shoes, lumber, and sugar after 1916. Rates 
were lowered on woolen from 94 per cent to 35 per cent; linen, from 
52 per cent to 35 per cent; ready made clothing, 79 per cent to 35 
per cent; cotton, 50 per cent to 30 per ceat. Briefly stated, the new 
tariff puts several important items on the free list, lowers the rates 
on other articles of necessity or where monopoly existed, and in- 
c»eased the rates on luxuries. 



ELEMENTS OF ECONOMICS 185 

CHAPTER XIII. 
Wages. 

117. DISTRIBUTION. We have considered the three fields of 
economics, Consumption, Production, and Exchange. We now turn 
to the fourth field, Distribution, which treats of the laws of wages, 
interest, profits, and rent. There are two phases of distribution, 
one dealing with the f-actors determining the total amount going to 
each of the four shares and the other dealing with rates of wages, 
interest and profits and the amount of rent on an individual piece 
of land. The latter phase of the subject is the most practical one 
and to that alone we will direct our attention. What we are chiefly 
concerned with is the problem of human welfare, namely, what each 
individual worker in society gets for his work. 

The problem is a very complex one, since there are several fac- 
tors involved, some are working in one direction and some in an- 
other, and a certain indefiniteness attaches to these forces because 
of the human element. The laws of production partake of the defi- 
niteness of physical laws, but the laws of wages and of interest 
and profits are much more indefinite. This does not mean that thes» 
laws are not known, but it means that they cannot be stated in 
quantitive terms. We know, for example, what forces make wages 
low, but we cannot tell how low those forces may send wages. 

The forces entering into the distribution are those of demand, 
supply, productivity, competition and the standard of living. These 
are the forces we must keep in mind. 

118. ANNUAL INCOME AND ANNUAL PRODUCT. It will be 
helpful to make a distinction between the annual income and the 
annual product. These are two very different things, though closely 
connected. The annual income includes the annual product and in ad- 
dition the enjoyment of all consumers' goods produced in past 
years. The enjoyment of the houses we live in is as much a part of 
our annual income as the enjoyment of the clothes we wear. The 



186 ELEMENTS OF ECONOMICS 

annual income, especially in old and rich countries, is much larger 
than the annual product. It is with the annual product that distri- 
bution is concerned. 

119. MONEY WAGES AND REAL WAGES. We must also 
distinguish between money wages and real wages. Under certain 
conditions money wages might be high while real wages are low and 
money wages might be low while real wages were high. It depends 
upon prices. If prices are very high, high money wages, that is, 
high as compared with other countries or other times, might not 
enable workers to live in decency. The really important question is 
not how many dollars a man gets for a day's work, but how many 
of the necessities and comforts can a man secure with a day's labor. 

In the mining camps of the West in the early days money wages 
were high, as compared with money wages in the East. But owing 
to the cost of transportation goods were very high in the mining 
camps, and the real wages were not much higher in the West than 
in the East. During the Middle Ages money wages were exceeding- 
ly low, as compared with present rates. In the time of Edward I. 
skilled workmen in London received about eight or ten cents a day, 
which seems to us an impossible condition. But when we read in an 
ordinance of the City of London that master craftsmen shall receive 
four pence a day or three half-pence a day and board at the em- 
ployer's table, the situation looks entirely different. These illus- 
trations serve to show the necessity of distinguishing between money 
wages and real wages. It is with real wages that distribution is 
concerned. 

120. DEMAND FOR LABOR. Demand for labor comes from 
capital. In modern industry very little labor is or can be used apart 
from capital. The amount of labor demanded, therefore, depends 
upon the amount of capital, providing capitalists do not miscalcu- 
late and create more capital along some lines than the extent of the 
market will warrant. Demand may vary to some extent owing to the 



ELEMENTS OF ECONOMICS ^ 187 

more or less intensive use of capital. If there is sufficient demand 
for its products, a factory may run night and day, or if there is a 
slackening demand, it may run on short time and with only a part 
of its labor force. Stating all these facts briefly, we may say that 
the amount of labor demanded depends upon the amount of capital 
and the intensity of its use. 

Along with demand is the force of competition. If the amount 
of capital increases and the number of laborers remains the same,, 
there will be active competition to secure laborers, and wages will 
rise. If a man has a factory he does not desire to see it standing 
idle and, as demand for labor tends to exceed the supply, he will of- 
fer higher wages than the usual rate in order to tempt laborers ta 
leave other employers. This is the effect of an increase of capital 
in case there is no considerable body of unemployed. If there is a 
large number out of work, there might be a considerable increase of 
capital before wages would begin to rise. 

The height to which wages would rise depends upon various 
conditions, such as the productivity of industry and the willingness 
of the capitalist class to continue to accumulate capital and reduce 
their profits. 

Under modern conditions, demand for labor is demand for cer- 
tain grades of labor in certain proportions. Machinery demands 
labor of different kinds and of varying degrees of skill. In a shoe 
factory, for example, there is the head manager, a number of fore- 
men, skilled workers of various kinds, and unskilled laborers to do 
various kinds of work, such as trucking and loading and unloading 
freight. Moreover, the demand for labor is demand for certain kinds 
of labor in certain proportions, depending upon the nature of the in- 
struments of production. A machine requires about so much at- 
tention, the amount depending upon the character of the machine. 
More than this number of men in connection with the machine would 
be a waste of labor. The relative number demanded of the different 



188 ELEMENTS OF ECONOMICS 

grades of labor is nat absolutely fixed at any given time, especially 
of the unskilled laborers. If wages are low, a few more might be 
used in keeping things a little neater and cleaner, or to do certain 
things that might be left undone if wages were high. But the limits 
of such variation in the relative number demanded are very narrow. 

Because of these facts demand for labor is often represented 
as a pyramid. The base of the pyramid is composed of a huge layer 
of unskilled labor. This labor is found in nearly all industries, but 
it practically forms one layer of the pyramid, since it can readily 
shift from one industry to another, and consequently the rates of 
wages of unskilled labor of different kinds tend strongly towards uni- 
formity. Just above the unskilled workers are several thin layers of 
semi-skilled workmen. These include laborers without technical knowl- 
edge but with valuable experience that greatly increases efficiency. 
Then come the real skilled tradesmen who have a technical knowledge 
of their trade, gained either from study or from apprenticeship, or 
both. In this class might be placed the workers in the building 
trades, iron moulders, machinists, office help, including stenogra- 
phers, typewriters and bookkeepers, and a great number who com- 
bine manual labor with a considerable amount of mental work. 
Above these numerous layers come the real brain workers, also in va- 
rious layers, with the great business managers with high salaries 
at the top. 

121. THE SUPPLY OF LABOR. The supply of labor may not 
correspond to this pyramid of demand; in fact there has for genera- 
tions been a strong tendency towards an oversupply of workers at 
the base of the pyramid and a scarcity at the top. In the first place 
the labor supply is not readily adjusted to the demand as in the case of 
an ordinary commodity. If there is an oversupply of an ordinary 
commodity, production is cut off. But the number of laborers chang- 
es slowly, and from the law of Malthus may tend to increase faster 
than capital. Moreover, since labor is like a perishable commodity, a 



ELEMENTS 'OF ECONOMICS 189 

decrease in demand for labor temporarily increases the supply seek- 
ing employment. When there is an oversupply of labor, competition 
among laborers forces wages down. If all laborers had to live wholly 
on their wages, that is, if charity did not supplement wages, the mini- 
mum of subsistence would set the lower limit of wages. But since 
charity is always supplementing starvation wages, there is no defi- 
nite limit to the fall in wages in the presence of an oversupply. 

The reason why the oversupply is usually found in the ranks of 
the unskilled laborers and never at the top of the pyramid is because 
there is not free competition among laborers. Over short periods of 
time there is no direct competition between unskilled laborers and 
those above them. That is, unskilled laborers cannot compete for the 
positions of the skilled or semi-skilled workers though the skilled 
workers may sink into the ranks of the unskilled and compete with 
them. Over long periods of time there has not been much competition 
between the unskilled and the skilled. The causes for this are various. 
The lower classes often do not possess the energy and intelligence to 
push themselves up and more often they do not have the opportunity, 
partly because poverty compels them to put their children to work too 
young, partly because the trade unions limit the number of appren- 
tices that can enter their trade, and partly because the public schools 
do not undertake to fit pupils to enter the skilled trades, except in 
the commercial subjects. 

There is considerable competition, over long periods of time, 
among the skilled workers. These classes have more intelligence 
and more opportunities than the unskilled workers, and they can 
prepare their children for the different trades. If wages tend to 
fall in any trade, some parents will prepare their children for other 
trades that pay higher wages. Hence we find a fair degree of uni- 
formity of wages among the skilled workers. Roughly speaking, 
the wages of those below the brain workers fall into two sharply 
defined groups. The better classes of unskilled laborers in the United 



190 ELEMENTS OF ECONOMICS 

States receive about a dollar and a half a day, while skilled workers 
receive four or five dollars a day and sometimes more. 

There is little competition between the real brain workers and 
those below them. Nature seems to have been niggardly in bestow- 
ing real mental power of the higher order. Consequently, we find 
a few far above the rest receiving princely salaries of $50,000 a 
year or more, while at the bottom several millions are toiling for a 
pittance of four hundred to five hundred dollars a year. Mr. J. A. 
Parks of the Massachusetts Industrial Accident Board recently 
asserted that statistics show that 19,000,000 working people in the 
United Sjtates earn less than $500 a year. This doubtless includes 
women and children who are wage earners. 

122. THE STANDARD OF LIVING. The standard of living 
affects wages both directly and indirectly. It affects wages indi- 
rectly by affecting the efficiency of laborers. If a high standard 
of living is maintained it is done to a large extent by limiting the 
increase in population. Young men who are ambitious to get on well 
in the world and bring up a family in a proper way usually delay 
marriage until their incomes are large enough to support a family 
according to their ideals, and small families is the result. Among 
the upper classes of laborers this is the prevailing condition, while 
among the lower grades of labor early marriages and larger families 
prevail. 

The standard of living has several direct effects upon wages. 
Sentiments of humanity may to some extent check the downward 
tendency of wages of the lower classes, either because employers 
themselves have some conscience or because public sentiment shames 
them into having some regard for the welfare of their employees. 
Within recent years public investigations have revealed the fact that 
laborers were not getting a living wage and sharp criticisms of 
employers by the press and the public have caused a rise in wages. 
Some states have enacted minimum wage laws, relying on public 



ELEMENTS OF ECONOMICS 191 

sentiment for their enforcement, the only punishment for not pay- 
ing the rate of wages set by the board being the publication in the 
newspapers of the names of such employers. Economic motives may 
help to keep up wages a little, since employers like to see their 
employees contented. 

But all these forces do not seem able to keep wages of the 
great masses of the lower classes of labor above the standard of 
decency. If any considerable number of employers disregard senti- 
ments of humanity and force wages down because an oversupply 
of labor enables them to do so, their rivals must lower wages or 
be driven out of business. Thus a small portion of the employers 
who are greedy for large profits may compel more humane em- 
ployers to violate the promptings of their better nature which would 
induce them to give the square deal. And it should be clearly under- 
stood that there is no economic necessity for paying less than a 
living wage in these days of machine production if all employers 
were willing to give their employees a square deal. This would 
not reduce their profits below a fair rate, because if all producers 
employing lower grades of labor paid higher wages, they could partly 
compensate themselves by raising prices, except where foreign com- 
petition prevented. A part of the increased wages of the lower 
grades of labor might come out of the wages of the skilled workers, 
in case foreign competition threatened to reduce profits below a 
fair rate, for all are workers for the common welfare and there 
is no moral justification for one class of labor starving while an- 
other class can live in luxury. 

123. PRODUCTIVITY. A fourth factor determining wages is 
productivity. This may mean the average productivity of industry 
per unit of labor, or the productivity of one laborer as compared 
with another, or the marginal productivity of labor. Let us con- 
sider these three phases of productivity in order. If the produc- 
tivity of industry is low wages must be low, for the simple reason 
that if little is produced there will be little to divide among the 



192 ELEMENTS OF ECONOMICS 

workers. If productivity is high the rate of wages may or may 
not be high, owing to the relation between demand for and supply 
of labor. If demand for labor is strong in proportion to supply, high 
productivity will cause wages to be high, because of the force of 
competition among employers for laborers. But if there is an over- 
supply of labor, high productivity will not make wages high, because 
of competition among laborers for work. Hence, we may have the 
strange situation of laborers starving in the midst of plenty. 

Differences in efficiency among individuals is a complex prob- 
lem and not easy to analyze. Differences in the efficiency, honesty 
and reliability of individuals doing the same kind of work is fairly 
easy to estimate, especially among workers below the intellectual 
groups. These differences help to account for the differences in 
■ wages of workers in the same class or trade. But trade union rules 
often prevent the natural workings of this principle, since the 
unions demand a uniform wage. This is true both of piece work 
and time work. Differences in efficiency are more marked as between 
workers in different grades, but more difficult to estimate. There 
is no comparison, for example, between the earning power of an 
efficient railway president and an efficient section hand. A good 
section hand might be worth two or three times as much as a 
poor one; a capable railway president would increase the earnings 
of the company possibly by millions of dollars yearly, while an 
incapable president would ruin the company. To state this in gen- 
eral terms, the differences in earning power of brain workers are 
immense while the differences in the earning power of manual work- 
ers are comparatively small. Hence, wages of the brain workers may 
be very high. Usually there is a scarcity of great ability and it 
can command such salaries only when there is a scarcity. If, for 
example, railway presidents of the first order of ability were as 
plentiful in proportion to the demand as section hands are in pro- 
portion to the demand, there is no economic reason why the wages 
of one group would be any greater tha:n the wages of the other. 



ELEMENTS OF ECONOMICS 193 

The more efficient workers can reap the benefit of their superior 
efficiency only in case of a scarcity of that kind of labor. To put 
it briefly, laborers of great productive power secure high wages 
because of efficiency and scarcity. 

Marginal productivity is a rather illusive idea. Its meaning 
may best be seen by an illustration. Suppose a factory employs a 
thousand workers, and that there are just enough to keep the 
machinery all running in good condition. If, say, ten workers are 
added, with no increase in machinery, there may be a slight increase 
in product, but the amount of increase per man will evidently be 
much smaller than the average product of all the men at work. 
This is really another way of looking at our familiar law of pro- 
duction, that the three factors must be used in the proper propor- 
tions or diminishing returns result. Thus an oversupply of labor 
in any group brings this law into play, and wages fall because 
marginal productivity falls. Before taking on more men the em- 
ployer estimates what they will be worth to him; and the pay of 
the marginal men, in the same kind of work, sets the pay for all 
in the group, because competition forces them to accept the rate 
offered. Thus from a different angle we reach the same con- 
clusion that where there is an oversupply of labor of any class the 
workers may starve in the midst of abundance of wealth. 



V 



194 ELEMENTS OF ECONOMICS 



CHAPTER XIV. 

Rent. 

124. NATURE OF RENT. Economic rent is a surplus gain 
from a natural agent above the cost of production on the margin of 
cultivation. "The "marginal" lands cultivated would be the poorest 
lands, either the least fertile or those most distant from market. 
The marginal producer is the producer making the least profits^ 
which would be only enough to pay wages and interest on capital, 
not counting the land as capital. This is the cost on the margin. 

The marginal producers would be able to make no more than 
enough to pay wages and interest because of industrial competition. 
If profits on the poorest land in cultivation were above the normal 
rate in other lines of business, capital would flow into agriculture and 
increase the quantity of the products until the fall in price made 
profits on the margin of cultivation equal to profits in other lines 
of business. 

Lands nearer market or more fertile yield a surplus above cost 
of production on the margin because of the greater fertility or smaller 
cost of getting products to market, and because all producers of the 
same quality sell in the same market at the same price. Take two 
tracts of land of equal fertility, one lying near a great market, say 
Chicago, and the other lying in North Dakota. The same expendi- 
ture per acre in labor and capital would yield in both cases the same 
quantity of product; but if the products of both farms sell in the 
Chicago market, the farm near Chicago has the advantage over the 
farm in North Dakota, for the farmer near Chicago would get higher 
prices than the farmer in Dakota. In this case the differential 
gain or surplus would equal the cost of transporting the crop from 
North Dakota to Chicago. If two farms are equally distant from 
market, the surplus would result from greater fertility. 

Why are not the total net profits from the land considered as 
interest on capital invested? If a man should buy a farm and then 



ELEMENTS OF ECONOMICS 195 

rent it to a tenant, why is not this "rent" money merely interest on 
money paid for the farm? If population and demand for farm 
products remained stationary after the purchase of the farm there 
would be no confusion in calling the income from it interest. But if 
population should increase we have a different situation. Suppose 
the population of the country or of the world should increase. The 
increased cost of production on the margin would raise the prices of 
farm products, and the increase in prices would increase the rental 
value of the land. Suppose a man buys a farm for $10,000. If the 
prevailing rate of interest is, say 5 per cent, the farm will rent for 
$500 a year. If prices double, the rental value would be $1000 a 
year, supposing no change in the general rate of interest. Thirty 
years ago land in eastern Nebraska was selling for about $20 an 
acre, but now the same land sells for $100 an acre; hence if a man 
bought land in Nebraska thirty years ago he would be receiving five 
times the prevailing rate of interest on his investment, assuming no 
change in rates of interest. But in fact the general rate of interest 
has fallen one or two per cent during the last thirty years. Thus it 
will be seen that the income from land and the income from capital 
invested in other industries are governed by different laws. 

125. URBAN RENTS. Economic urban rent means the same as 
agricultural rent, it is the surplus above the marginal gains from a 
natural agent. We must, as in agricultural rent, exclude capital 
such as buildings and improvements. Rent is the return from the 
land only. In ordinary usage we may speak of renting a house; but 
in economics we must distinguish between the land, which is a fixed 
quantity, and capital which may be increased at will. As population 
increases in a city it is not the value of the buildings that increases 
but the value of the land. ^ 

The rent of business establishments obeys the same laws that 
govern agricultural rents. Agricultural rent is governed by the fer- 
tility of the soil and location. Urban rent is governed by location 



196 ELEMENTS OF ECONOMICS 

alone. Take for example, the "Loop" district of Chicago or the 
down town district of New York City. A business establishment in 
either of these localities will rent for many times as much as it 
will in the outskirts of the city, because of the advantages of the 
location. The cost of the building would be the same whether erected 
in the down town section or on the edge of the city. It is perfectly 
clear, therefore, that the land is the essential element that gives rise 
to differences in the earning power. In residential districts property 
rents for more or less according to location. 

126. RENT NOT A CAUSE OF HIGH PRICES. High rents do 
not cause high prices. This seems an absurdity at first sight, since 
nothing looks clearer than the statement that the rent enters into 
the cost of production. But the causal connection is just the reverse 
of that commonly supposed to exist, for high rent is the result of 
high prices. Prices are determined by the cost of production on the 
margin and whatever increases the cost of production on the margin 
increases rent. Society is therefore not injured because the owner 
of a valuable tract of land gets high rents, but it is injured by the 
forces that increase the cost of production on the margin. 

127. RENT AN UNEARNED INCOME. From what has been 
said it appears that rent "grows" without any thought or effort on 
the part of the owners of the natural agents of production. Rent 
is not the result of labor, but the result of natural monopoly. As 
there is not enough of the best lands to supply the needs of man, 
poorer lands must be resorted to, and this causes rent to come into 
existence, by giving to the owners of the better lands an increased 
income. Any force which raises the cost of cultivation on the mar- 
ginal land, or causes poorer lands to come into cultivation, increases 
the rent on the lands above the margin. Rent is not the result of 
the bountifulness of nature but of the niggardliness of nature. As 
population increases and needs more food, poorer lands must be re- 
sorted to, which increases the price of agricultural produce, and this 
increase in price automatically increases the rent on all lands above 



ELEMENTS OF ECONOMICS 197 

the margin. 

It is sometimes urged that not all of rent is unearned in case of 
the pioneer who goes out into the wilderness and brings new lands 
into cultivation. Part of the rent, it is urged, is reward for the toils 
and privation of pioneer life. But this toil and privation is the 
cause of high cost of cultivation on the margin, and in the natural 
workings of competition is rewarded by high price of produce. It 
is true that in anticipation of the future increase in the value of the 
lands in the "pioneer" country too many may take up new lands 
and unduly increase the supply of produce and depress prices below 
the normal cost level on the margin. In the early days of the pioneer 
better days were always expected in the future. For a time, there- 
fore, their rewards were not enough to cover ordinary wages and 
interest on capital invested. In a sense, therefore, the first rents 
that; appeared when the margin of cultivation had passed beyond 
these pioneers may be considered as compensation for the low wages 
and low interest during the pioneer days. But this is a very small, 
part of the economic rent in existence. Lands which cost nothing 
fifty years ago are now worth a hundred dollars an acre or more, 
and in such cases the amount of the rent that is due to hardships 
of pioneer days is too small to be considered. 

128. RENT AND THE INCREASE OF POPULATION. We have 
repeatedly referred to the fact that an increase in population in- 
creases rent. It is now time to see just why this is true and to 
see the effects of it upon the welfare of the human race. As popu- 
lation increases, more food and other products of the land are needed 
in the cities. To meet the new demands for the products of the land, 
poorer lands must be brought into cultivation, and this increases the 
cost on the margin, and the increased cost increases prices, and in 
cities the increased demand for the desirable location increases urban 
rents. 

It is the increasing prices of products and the increasing cost of 
a place in which to live that bear ever harder upon the lower classes. 



198 ELEMENTS OF ECONOMICS 

With the increase in population an ever increasing amount goes to 
the owners of the superior lands. But the owners of the superior 
lands are not to blame for this increasing cost of living and the in- 
creasing hardship which results to the wage earners unless wages 
rise with rents. But the wages of the unskilled laborer in this coun- 
try have not risen with rents in the last generation, and in the case 
of a very large percentage of unskilled workers money wages have 
actually declined. Thus an increase in population, if it comes chiefly 
among the lower ranks, naturally places them between two mill- 
stones; oversupply of labor depresses money wages and increasing 
rent enhances the cost of living. If the owners of the superior lands 
are not to blame for this increased suffering of humanity, who is to 
blame? Nobody is to blame except those who unduly increase the 
population and thus increase the cost of production on marginal land. 
Rent in case of agricultural lands is not the cause of high prices but 
the result of high cost on the margin. In case of urban rents, the in- 
crease is due to a shortage in supply of the be§t sites, and the owners 
of them are not to blame if there is an increased demand for them. 

129. THE SINGLE TAX. Considering the ill effects of increas- 
ing rents, Henry George worked out a theory of taxation which may 
be briefly stated as follows: The product of a man's ovni labor is 
absolutely his and the state has no right to tax it. Rent is unearned, 
and the state has a right to take it away by taxation, and a tax on rent 
is therefore the only justifiable tax. Since all the rental value 
of land accumulated in past years is due to social forces, society 
has a right to take it all and not merely the future increase in 
rents. Most of the poverty of society is due to increasing rents, 
hence, a tax which takes away rents will relieve poverty. 

The first proposition is inadmissable. The state must exist, it 
must have funds, and it has a right to take from the members of 
society, who receive the benefits of the state's activity, the funds for 
its support. The third proposition cannot be accepted. Society has 



ELEMENTS OF ECONOMICS 199 

permitted people in good faith to purchase land, often with their hard 
earned money, and to confiscate it would be an unjust robbery. The 
last proposition is only partly true. Increasing rents are only partly 
responsible for poverty, low wages of the unskilled laborers being 
the chief cause. Moreover, the taking of rents by the state will not 
in the least lower the rents and will therefore relieve poverty only 
in so far as other taxes would be abolished. It is strange that the 
advocates of the single tax imagine that rents are to be lessened by 
taxing them. It is possible that the price of lands held for specula- 
tive purposes, especially city building lots, would fall in value. But 
it is not possible that true economic rent will be lowered by taxing 
it. Agricultural rent is determined by the marginal cost of pro- 
duction, which would not be affected by a tax on rent, because mar- 
ginal land pays no rent. The single tax would simply give the rent 
to the state and would not destroy it. 

About all that can be said in favor of a tax on rent is that it 
is an excellent source of taxation, among other kinds of taxes. It 
does not appear reasonable that real estate should pay all the taxes 
and the great corporations go free. As a special tax for cities, a 
tax on urban rents is being favorably considered in several countries, 
and land taxes, levied on rental values, is also coming into use. On 
the whole, though most of Mr. George's theories are not to be ac- 
cepted, he has nevertheless pointed out an excellent additional source 
of taxation. 



200 ELEMENTS OF ECONOMICS 

CHAPTER XV. 
Interest. 

130. NATURE OF INTEREST. Interest is the reward of capital 
and springs from the advantages of the capitalistic method of pro- 
ductionc Capital multiplies many fold the productive power of man. 
It is estimated, for example, that machinery for spinning and weav- 
ing cloth has multiplied man's productive power three hundred fold, 
not counting the labor of making the machinery. The modem rail- 
way multiplies efficiency many fold. But the owners of capital do 
not reap all the advantage, because competition among the owners 
of capital compels them to share the advantage with consumers. In- 
terest, therefore, is not what capital earns for society but what it 
earns for its owner, which is much less than what it earns for 
society. 

We have seen that rent is not a uniform rate received from 
all land, but a variable amount. Interest, on the other hand, tends 
towards uniformity in the same community. Where there is no ele- 
ment of risk, interest received on capital loaned is quite uniform in 
the same locality. This is because free capital in the form of money 
or credit is the form in which capital is loaned, and it is homogeneous. 
Capital goods in which money is invested is not homogeneous nor 
does the concrete capital in different forms earn the same amounts, 
necessarily, though competition, where it exists, has a tendency to 
reduce the earning power of all capital to a uniform level. For these 
reasons we may speak of an average rate of interest. In this respect 
the earnings of capital are similar to the wages of labor of the same 
grade. 

131. THEORIES OF INTEREST. There are several theories of 
interest, three of which should be briefly considered. One is the 
abstinence theory, which holds that interest is the reward of absti- 
nence. The accumulation of capital is looked upon as a disagreeable 
process, in which one foregoes present pleasures with the hope of 
increasing future pleasures. A similar theory is that interest is the 



ELEMENTS OF ECONOMICS 201 

reward of waiting. The Socialists ridicule these theories. Imagine, 
say they, the Goulds and Vanderbilts and Carnegies pinching and 
saving and undergoing great hardships in increasing their capital. 
But it is a sufficient answer to the Socialists to point out the fact that 
not all capital is saved by millionaires but a considerable portion 
is saved by the middle classes who do forego many present pleasures, 
and not a little is saved by the poorer classes as is proved by savings 
banks and insurance companies. A third theory of interest is the 
productivity theory, which holds that interest is paid because of the 
productive powers of capital. 

All of these theories are incomplete and not all of them are 
looking at interest from the same point of view. The abstinence 
theory, especially in the hands of modern writers, is an attempt ta 
justify the payment of interest. The productivity theory, on the 
other hand, is an attempt to explain why interest is paid and what 
determines the rate. Each class of writers sees a certain amount of 
truth. Each of the forces, abstinence, waiting and productivity, plays 
a part in explaining both why interest is paid at all and how much, 
and at the same time all these factors together afford a sufficient 
justification for the payment of interest. Whatever hardship is in- 
volved in saving tends to lessen the amount, of capital, which in turn 
affects its earning power, as we shall see later, and people save 
because capital has power in production. From the borrower's point 
of view interest is paid on capital only because it is productive and 
its earning power determines wheat the borrower is willing to give. 

132. DEMAND AND SUPPLY. The forces determining the rate 
of interest are demand and supply and productivity. Demand and 
supply are relative, as in the case of demand and supply of goods 
or labor in the theory of prices or of wages. As demand for capital 
increases, the rate of interest rises, because the owners of loan capital 
take advantage of the situation as the owners of ordinary goods da 
under like conditions. Competition among those who wish to borrow 
capital sends up the rate of interest just as competition among buy- 



1202 ELEMENTS OF ECONOMICS 

ters forces up the prices of goods when there is an increase in de- 
mand. A decrease in demand lowers interest because owners of cap- 
ital then compete with each other to keep their capital all loaned. 

An increase in the supply of capital also brings increased com- 
petition among owners to keep it all invested and the rate of interest 
falls. An increase in the supply of capital affects the earning power 
of capital, and this leads to the third great factor determining the 
rate of interest. 

133. PRODUCTIVITY. The main factor determining the rate of 
interest is the productivity of capital. Productivity is the main factor 
^because it directly determines what borrowers can afford to pay and 
thus affects demand, and productivity also determines indirectly the 
supply. The greater the productivity the greater the accumulation 
of capital for the future, and the rapid accumulation of capital will 
in time reduce the rate of interest. Thus there is a very intricate 
interplay of forces. 

Productivity of capital may mean at least three different things. 
It may mean (1) the advantage gained by society from the use of 
capital as an instrument of production, (2) the productivity of in- 
dustry as a whole, (3) the marginal productivity of capital. 

Let us consider each of these in order. As stated above, interest 
is not measured by the labor saving power of machinery, because of 
competition of the owners of the machinery. If, for example, a man 
invents a machine that will do twice the work of the old machine, he 
can retain nearly the whole advantage of the new machine if he can 
secure a monopoly of its use. Thus our patent laws often create mil- 
lionaires. But when the patent expires others use it and the price 
of the article made by the machine falls until capital invested in 
it makes about the rate prevailing in other industries, because so 
long as interest in one field remains above the average rate capital 
will pour into the field and increase the supply of goods, and the 
laws of consumption bring down prices. Hence, the productivity of 
capital in this sense does not govern the rate of interest. The own- 



ELEMENTS OF ECONOMICS 203 

ers of capital, however, are benefited as consumers by the improve- 
ment in the efficiency of capital, since they get their goods cheaper 
and thus enjoy what economists have called consumers' surplus. 

Productivity of capital may mean the productivity of industry 
as a whole, meaning the efficiency of the three factors, land, labor 
and capital. In a new country with rich virgin soil and rich mineral 
deposits, the rate of interest may be high. But it will not necessarily 
be high. If laborers are scarce, wages may absorb most of the 
special advantages of that country over others, and in that case 
interest would not be especially high, though it would be apt to 
be above rates in older countries, because of the relative scarcity 
of capital. In the latter case both wages and interest would be above 
rates in other countries less favored. Thus general productivity 
has an effect upon the rate of interest, though the productiveness 
does not exactly measure the rate, since capital may have to share 
with labor the advantages of the rich natural resources. 

But the rate of interest is measured by marginal productivity, 
which, as in the case of labor, may not correspond at all with the 
general productivity of industry. Let us take an illustration. Sup- 
pose one railroad could easily handle all the traffic between two 
places. If another railroad is run parallel to it and gets half the 
traffic, each road will have its earnings reduced by at least one-half, 
and probably more, owing to the law of economy in large-scale pro- 
duction. If competition should reduce the rates, earnings would be 
still further reduced. Again suppose there are ten shoe factories in 
the community and that they are able to supply all the shoes wanted. 
If another shoe factory is set up, each factory will have smaller sales 
and prices will also be reduced. If the increase in capital is general 
and labor is not increasing as rapidly as capital, the law of propor- 
tionate use of the three factors would come into play, and each addi- 
tional "dose" of capital would find it harder to wedge its way into 
the industrial machine and its earning power would constantly be 
reduced, because the two factors, labor and capital, would be more 



204 ELEMENTS OF ECONOMICS 



and more out of proportion. This would mean and increasing: demand 
for labor, with a consequent rise of wages. Thus as capital increases, 
labor remaining the same, the earning power of capital falls for 
three reasons, (1) the fall in the marginal productivity, considering 
merely the physical product, (2) the fall in prices of products, (3) 
the rise in wages. 

To summarize, we may say, briefly, that the rate of interest de- 
pends mainly upon the marginal productivity of capital, which is de- 
termined by the productivity of industry and the relation between the 
number of laborers and the amount of capital. 

134. LONG- AND SHORT-TIME LOANS. Long-time loans do 
not depend upon the amount of money in circulation, because the 
earning power of capital does not depend upon the amount of money. 
This is true except in the extreme case where money is so scarce that 
industry is hindered. Under such conditions an increase in the 
amount of money would stimulate industry and make it more pro- 
ductive and the rate of interest would rise. The common notion is, 
however, that an increase in the amount of money lowers the rate of 
interest because it decreases the demand for capital. Demand is 
not merely for money, however, but for the instruments of produc- 
tion. And the rate of interest depends upon the demand and supply 
and marginal productivity of capital, meaning the concrete instru- 
ments of production. An increase in the amount of money would 
not increase or decrease the number of tools and machines nor make 
them more productive, except in case society was experiencing a 
money famine, such as it experienced in the Middle Ages. Under 
ordinary conditions, therefore, the rate of interest does not depend 
upon the amount of money, for long-time loans. 

For short-time loans, however, the case is somewhat different. 
If loan capital, either money or credit, is temporarily scarce, owing 
to some disturbance in the money market, business men will exper- 
ience difficulty in securing their accustomed loans from banks, and 
if they cannot get loans their business may be disarranged. Under 



ELEMENTS OF ECONOMICS 205 

these conditions the rate on short-time loans will rise. And the rate 
may go far above the ordinary rate on long-time loans, because men 
may lose more by failing to secure a loan to help them out of a 
tight place than they would lose by paying high interest charges. 

135. THE JUSTIFICATION OF INTEREST. The payment of 
interest has been assailed as unjust by many writers of all ages 
from the time of the Ancient Greeks, and early Christian nations for- 
bade the payment of interest. The ancients attacked the payment of 
Interest on the ground that money is barren. This idea arose partly 
because money was usually borrowed not for productive operations 
but for indulging in leisure, and partly because capital in the modern 
sense hardly existed. The early Christian writers assailed the pay- 
ment of interest both because money was considered "barren" and 
because it was deemed a breach of brotherly love to charge a man 
interest. 

The Socialists hold that the payment of interest robs labor. 
The capitalist is considered a social parasite who gathers where he 
has not sown. In the view of the Socialists, labor creates the whole 
product, capital and all, and that the whole product, therefore, be- 
longs to labor. Much depends upon what is meant by labor. It is 
quite true that capital was created by the efforts of man, and in that 
general sense labor created capital. But there is more than physical 
labor required to create capital. As we have seen in a previous sec- 
tion, the creation of capital requires three distinct processes. First 
is the mental activity which conceives the ideas embodied in the in- 
strument of production. That is, it had to be invented. Secondly, 
the ideas had to be • embodied in the machine, that is, labor had to 
make it. Thirdly, in order to direct labor towards the production of 
tools and machinery, funds must be saved from current income. 
Present pleasures must be reduced in order to save for investment. 
It is therefore incorrect to assume that labor alone creates capital. 
Finally, no one can maintain the proposition that the present labor 
force of the world created the capital of the world. It was not they 



206 ELEMENTS OF ECONOMICS 

or their ancestors that invented and saved and planned and thus 
made possible the creation of the capital of the world. If they or 
their ancestors had thus invented and saved and planned they would 
have been the capitalist class and would not have been Socialists. 

The payment of interest needs no defense. It is a matter of 
practical utility. No man or class of men is denied the right to in- 
vent and plan and save, and because this is done by a comparatively 
few individuals, the enterprising ones should not be deprived of the 
advantages which the ownership of capital brings. Without the hope 
of reward which the ownership of capital brings, it is safe to say 
that there would be little invention or planning or saving. 

No doubt the payment of interest allows a capitalist leisure 
class to grow up, which in a few generations may become in a sense 
social parasites, since they live on the interest of past accumulations 
without contributing anything to society. Also rivalry and the 
scramble for wealth may become too severe and even unchristian. 
These are some of the evils which society should endeavor to correct 
by the inculcation of a higher sense of stewardship and brotherly 
love. 



ELEMENTS OF ECONOMICS 20T 

CHAPTER XVI, 
Profits. 

136. NATURE OF PROFITS. Profits are the reward of the 
business manager, and are in a sense a kind of wages. Wages and 
profits are alike in several respects. Unlike interest, both wages 
and profits vary widely. Wages range from the mere pittance of 
$300 or $400 a year to $50,000 a year or more; profits range from 
zero up into the millions. Both wages and profits are earned, and 
are therefore unlike rent. Profits are earned, however, only when, 
no monopoly exists. In that case profits are like rent, unearned, as, 
they do not come from skill in management but from arbitrary 
power to raise prices. 

Profits and wages are, however, unlike in several important- 
respects. Wages change slowly, while profits change rapidly, going- 
up in good years and going down in "lean" years. There is a slight 
tendency for wages to fall also in times of industrial depression, but 
as compared with the great fluctuations of profits, wages are fairly 
stable. Wages and profits differ in another respect. Profits, over 
short periods of time at least, are a residual share, while wages, 
receive a rate stipulated in advance. 

This residual character comes from the position of the business 
manager. He hires the laborers, rents or leases land, and usually 
borrows a part of his capital, and to laborer, capitalist and landlord 
he pays a stipulated amount. If his plans turn out well, his profits 
will be high, but if they do not his profits will be low, or he may- 
even suffer loss. Hence, over short periods of time the manager 
gets what is left after paying interest, wages and rent. These in . 
brief are the general characteristics of profits. Let us take up some 
of these points in detail. 

137. A RESIDUAL SHARE. Over short periods profits are a 
residual share or a surplus, because the employer is the buffer, so to 
speak, between waves of industrial prosperity or adversity on the 



208 ELEMENTS OF ECONOMICS 

one side and laborers, capitalists and landlords on the other. General 
conditions of demand and supply determine what he must pay for 
labor and capital and land. Not every business manager borrows 
capital and rents land; but such a large number do that the rates of 
interest and the amount of rent is easily determined, at least rough- 
ly. Hence each manager can tell roughly whether he is making any- 
thing above rent and interest, that is, whether he is making any 
profits or not, and if he is, how much. 

Over long periods of time, however, profits are not a mere 
residual share, because the manager is a lector in the various bar- 
gaining processes. He bargains with his laborers, but he is a dis- 
tinct factor in the bargain. He is not compelled to pay what laborers 
ask, regardless of circumstances. Conditions of demand and supply 
and productivity he knows far better than his laborers, and he is not 
therefore a helpless victim, but a very active factor in determining 
what he shall pay. In his bargain with interest receivers he is also 
an active factor. He knows the conditions of demand and supply 
of capital and its marginal productivity, on the whole, and he is an 
active factor in deciding what shall be the rate of loan interest. 
Even the amount of rent he pays is to a limited extent the result 
of a bargaining process, though rent is more nearly predetermined 
by circumstances over which neither party to the bargaining process 
has any control than is the case with wages or interest. Thus in the 
long run profits are not determined by accident, but by general 
economic conditions and the relative shrewdness and strength of the 
different parties to the various bargains. 

138. NO UNIFORM RATE. As stated above, profits vary wide- 
ly. The figure of the pyramid applies as in the case of labor, 
though the layers are less sharply defined. The great mass of man- 
agers make very little above interest on their capital, and many make 
no profits at all. A smaller number make fair 'profits, a still smaller 
number make large profits and far above all the rest are the great 
"captains of industry" who make enormous profits. And we here 



ELEMENTS OF ECONOMICS 209 

speak not of the amount of profits but the rate upon the capital 
invested. 

The causes of these differences in the rate of profits are differ- 
ences in managing ability and differences in the size of the estab- 
ments. We have already discussed the advantages of large-scale 
production and all that is necessary at this point is to call attention 
to them. Differences in managing ability are due mainly to inborn 
characteristics, though training and experience are necessary to 
give those powers an opportunity to develop. Great managing abil- 
ity includes several things, among them being judgment in buying 
and knowledge of market conditions. 

A different set of causes for lack of uniformity in profits is 
connected with various temporary fluctuations in business condi- 
tions. In agriculture and allied industries seasonal changes alter- 
nately increase or decrease profits. Changes in fashion also play 
their part, and the producer who can forecast coming freaks of 
fashion reaps handsome rewards. Periods of industrial depression 
affect more widely rates of profits, as such reverses overtake whole 
communities rather than a few individuals. Then in periods of 
''boom" profits are high. 

139. PROFITS AND INTEREST. As indicated by the previous 
discussion, profits are not a residual share in the long run, since the 
employer or manager is one of the factors in the various bargains 
which determine wages and interest. This suggests a connection 
between interest and profits. Any industrial changes that make 
business more profitable enhance first the earnings of the business 
manager. As the general range of profits tends to rise, loan interest 
will naturally tend to rise. Those who loan capital keep posted on 
industrial conditions, and any rise in the earnings of the managers 
of industry would naturally cause them to demand higher rates, and 
since lenders of capital constitute one factor in the bargaining 
process, loan interest would tend to rise. Also the presence of a 
large number of able managers would cause them to bid against 



210 ELEMENTS OF ECONOMICS 



one another for capital, in order to enlarge their business, and 
this would cause the rate of loan interest to rise. 

On the other hand, a fall in the rate of profits would be followed 
by a fall in the rate of interest. If managers could not make much 
the demand for loan interest would not be active and strong and 
the rate of loan interest would fall. Thus profits and interest tend 
to rise and fall together, though profits take the lead and the 
changes in rates of interest follow somewhat tardily. 

140. PROFITS AND WAGES. Profits and wages are also con- 
nected, but the connection is different from that between profits and 
interest. As wages fall, owing to increase in the number of laborers,, 
profits rise. Or a sudden improvement in machinery on a vast scale, 
as during the Industrial Revolution, will throw men out of employ- 
ment in vast numbers and wages fall. Under such conditions, how- 
ever, profits are abnormally high. During the Industrial Revolution 
in England, vast fortunes were made by manufacturers in a few 
years, while a large portion of the laboring population were on the 
verge of starvation. Wages may, however, under some circumstances^ 
rise with the rise in rates of profits. In periods of prosperity in- 
creasing demand for labor raises wages, while profits also increase. 

Since extra high profits of one employer over another are due 
to managing ability chiefly, it follows that extra high profits do not 
come out of wages. This is on the supposition that different em- 
ployers pay the same rates of wages for the same class of labor. La- 
borers therefore have no just grievance against those employers 
who by their superior ability are able to secure a larger product. 
In fact, the able managers are a special benefit to society as a 
whole, including the laboring men, because they increase the total 
product of society and thus make possible a larger income to all 
members of society. 

This does not mean that employers generally may not take ad- 
vantage of conditions of the labor market and depress wages. Under 
these circumstances increased profits would come out of wages. 



ELEMENTS OF ECONOMICS 211 

141. DISTRIBUTION AND SOCIAL PROGRESS. There are 
four phases of social progress of the present time that are of vital 
importance and that deeply affect the distribution of a nation's 
wealth. These phases of progress are the improvement of the instru- 
ments of production, the increase in the size of the business unit, in- 
creasing monopoly, and the increase in population. 

With the improvement in machinery productivity increases, 
profits rise rapidly, interest follow^s more slowly, and, when improve- 
ments come suddenly on a large scale, men are thrown out of em- 
ployment and wages fall. In course of time, however, unless low 
standards of living among laborers prevent, by keeping the labor 
market oversupplied, the wants of the community will expand, ma- 
chinery of the old type and new machinery for supplying new wants 
will multiply, demand for labor will increase, and wages will rise. 
Thus the final result may be a rise in prices, interest and wages, all 
three agents sharing in the increased product. 

The increase in the size of the business unit enhances profits, 
especially of men of the greatest ability, because the larger business 
unit gives more opportunities for using great ability. This increase 
in the size of the business unit decreases the number of independent 
managers, and the employing class becomes more of an aristocracy 
of wealth. Instead of millions of business managers with moderate 
wealth, there comes to be a few thousand managers with a few mil- 
lions of capital and at the top a few scores of men with hundreds of 
millions. If these vast fortunes are made by real skill in managing 
legitimate business, the public are not injured, necessarily. If, how- 
ever, these vast fortunes are made by gambling in stocks or in mis- 
managing large business in the interests of the few managers, so- 
ciety is injured by the accumulation of such vast fortunes. There 
is political danger in such great fortunes, also, since a few men might 
use their vast wealth to corrupt or influence the government to get 
legislation to help them pile up more billions. 

Increasing monopoly is wholly evil. It is not attended with in- 



212 ELEMENTS OF ECONOMICS 

creased efficiency, except in the case of natural monopolies. The re- 
sult of increasing monopoly outside of the natural monopolies does 
not increase the social wealth but only diverts an increasing pro- 
portion of it into the pockets of a few, to the detriment of all the re- 
mainder of society. Monopoly, therefore, must be suppressed when 
possible, and where suppression is impossible, the monopoly must 
be either regulated or owned by the government. 

The fourth main factor in social progress is the increase in pop- 
ulation. This increases demand for food and other agricultural 
products, the demand is supplied at an increased cost of production 
which at once increases rent and the cost of living, and the increasing 
cost of living diminishes the income of all except the landowners. If 
the increase in population comes largely from the laboring classes, 
as it invariably does, wage earners will be injured not only by the 
increasing cost of living but by the fall in money wages, unless the 
increase in capital keeps pace with the increase in laborers. 

The net results of the interplay of all these complex forces are, 
in the United States especially, (1) a great increase in the wealth of 
the landowning class, which fortunately is numerous, (2) the growth 
of fabulous fortunes in the hands of a few, (3) increasing wealth of a 
relatively smaller number of business men below the multi-million- 
aires, (4) increasing wages of the workers in the upper and middle 
portions of the pyramid of labor, and (5) the lower layer of the pyra- 
mid sinking into worse conditions than were ever known before in 
this country. Out of these complex results grow the great social 
problems of distribution. The problem of monopoly we have elready 
discussed. Labor problems must now be considered. 



ELEMENTS OF ECONOMICS 213 

CHAPTER XVII. 
Labor Problems. 

142. ORIGIN OF LABOR PROBLEMS. Labor problems are as 
old as civilization. As soon as division of labor had progressed 
far enough to create a wage-earning class, trouble arose between 
employer and employed, and if we had a more complete industrial 
history of early ages it would doubtless reveal more contests in 
the industrial world than the few strikes recorded in early his- 
tory. But long, severe, and widespread warfare between laborers 
and employers is characteristic only of modern times, and is a re- 
sult of the industrial revolution of the eighteenth century. 

That revolution produced at least four vital changes in the in- 
dustrial world out of which changes modern labor problems grew, 
(1) the gap between laborer and employer was widened, (2) the 
feeling of unrest among laborers was intensified, (3) laborers were 
gathered together in large groups in cities or in mining camps, (4) 
strong labor unions sprang into being. 

In the handicraft stage employer and employed worked to- 
gether in the same little shop and both belonged to the same social 
class. Laborer and employer were not exactly on terms of equality, 
but there was no great difference between them. As compared with 
the great lords who dominated society, all industrial classes were 
very humble folks. The chief exceptions to this were the few mer- 
chant princes and bankers who arose toward the close of the Middle 
Ages. Very commonly employer and laborer were practically mem- 
bers of the same household, the master craftsman furnishing board 
and lodging to his half dozen apprentices and journeymen. More- 
over, the more ambitious journeymen soon became employers them- 
selves, setting up their own little shops. Thus there was no sharp 
line of distinction between employer and employed. But the in- 
dustrial revolution concentrated the management of industry in the 
hands of a few, and the mass of the laborers have no hopes of being 



214 ELEMENTS OF ECONOMICS 

anything: but wage earners, the employer belongs to a different 
social class, and the old feeling of personal friendship between em- 
ployer and employed has vanished. 

Discontent among the laboring classes would naturally increase 
from these changes. The great body of master craftsmen would 
feel humiliated by the loss of their industrial independence, and the 
aspiring among the apprentices and journeymen would feel a like 
disappointment. If these were the only changes produced by the 
industrial revolution the struggle between capital and labor might 
have ended after one or two generations. But the creation of a new 
aristocracy of wealth would establish a permanent barrier between 
the two classes and make the struggle permanent. Other changes 
added to the unrest. The factories were not as sanitary and as 
pleasant to work in as the little shop of the handicraftsman, and 
the introduction of the new machinery made the laborer merely a part 
of the great machine. Under the old system the workman was largely 
master of his own movements, and the master himself set the pace. 
Under the new system the great steam engine which runs the 
machinery sets the pace and the master sits in the office and, from 
the point of view of the men in the factory, has an easy time. More- 
over, hours of work became longer and wages decreased for a time. 
And even when wages remained the same or slightly increased the 
workingmen saw their employers becoming wealthy and the feel- 
ing grew that laborers were not getting their just share of the 
increased product. 

The third great change was the congestion of labor in great 
cities. Many of the handicrafts thrived best in the small villages 
where their raw materials could easily be obtained from the sur- 
rounding farms. The great factory, the railroad, and the steamship 
concentrated industry in a few favored spots, and local markets be- 
came world-markets for the great staple products. This conges- 
tion of labor fed the growing discontent, for it brought the 
discontented together and enabled them to talk about their grievances. 



ELEMENTS OF ECONOMICS 215 

Discontent thus became massed in a few spots and gained power by 
the concentration. 

Out of such conditions labor unions developed. Here were all 
the elements needed to create such unions. Under the handicraft 
system no strong unions were possible among wage earners, since 
the more intelligent and ambitious among them expected them- 
selves to become employers of labor. Now no such hope exists, 
and a genuine class consciousness would develop. The permanent 
grievances would be common to all and would strengthen the class 
feeling and suggest remedies. Being in close contact, men could 
talk over their grievances and plans of action. The old trade gilds 
of the handicraftsmen naturally suggested unions of workingmen, 
and trade unionism sprang into life. 

143. FORMS OF LABOR ORGANIZATIONS. There are four 
forms of labor organizations. The Knights of Labor type is an attempt 
to unite all classes of labor in one great union. The theory was 
that all wage earners have certain common grievances and all ought 
to stand together. But grievances are common to call classes of 
labor only in a general way. In practice specific grievances of one 
group of workers may be entirely different from the grievances of 
another group, and other groups may be fairly well satisfied with 
their conditions. Hence harmony of action is impossible. Because 
of these defects the Knights of Labor never succeeded in gaining a 
large number of members and it long ago ceased to exist. 

Another type of organization is the trade union, in which mem- 
bers of each trade form a separate union. In the building trades 
carpenters form a union, bricklayers another, plasterers another and 
hod carriers another. In the railway industry, engineers, firemen, 
conductors, and brakemen have separate unions. Each trade 
has its local union, often a district or state union and usually a 
national union, so that for certain purposes members of a trade 
throughout the whole country may act together. They might for 
example create a national strike fund so that when members in one 



216 ELEMENTS OF ECONOMICS 

part of the country are on a strike they may receive help from the 
national fund. Men on a strike often receive half-pay from the 
union. This type of union is the prevailing one in all countries today 
where labor unions are found. 

A third type of organization is the industrial union, in which 
all those working in a given industry form one organization. This 
type of union is represented by the Industrial Workers of the World 
which is a new organization and as yet has comparatively few mem- 
bers. In this form of union all railway employers would form one 
union, all those in the building trades another; and so on. This 
type of union is largely the result of certain weaknesses in the 
trade union. Some laborers feel that the struggle with employers 
is apt to be more successful if all the employees of any one com- 
pany, firm, or individual, stand together in one union. If only one 
group of workers in any establishment go on a strike their places 
could be filled much more easily than if all the workers go on a 
strike. By thus standing together the industrial union is a much 
stronger fighting organization than the trade union. There are 
some industrial unions not belonging to the Industrial Workers of 
the World, as in the coal mining industry, in which the United 
Mine Workers include all classes of labor in and around the mines. 

Either of the last two types of union may be federated into a 
general union of the trade or industrial unions. Thus the Ameri- 
can Federation of Labor seeks to unite all trade unions, and some 
industrial unions. Trade or industrial unions of each city or locality 
are formed into a local federation and the national unions are joined 
in a national federation. Owing to the fact that some trade unions 
have no national organization, local unions are sometimes members 
of the national federation, and local federations may also be mem- 
bers of the national federation. The purposes of uniting national 
trade and industrial unions into a federation are various. Repre- 
sentatives of all classes of labor may meet for considering broad 
general questions such as general aims and the best means of ac- 



ELEMENTS OF ECONOMICS 217 

complishing those aims. Also the federation may aid members on 
strike. 

144. OBJECTS OF TRADE UNIONS. The two main aims of 
trade unions are educational and economic. Educational activities 
are mainly the study of economic and social problems by means of 
lectures and evening classes and the propagation of unionism among 
the working classes by trade union journals. The American Federa- 
tion of Labor publishes a paper devoted to the broader interests of 
labor and many of the national unions publish journals. 

The second object or group of objects of trade unions is to im- 
prove the economic conditions of laborers. The thr^e main economic 
aims are to secure higher wages, shorter hours and better condi- 
tions of labor. To secure these aims unions seek to influence legis- 
lation and to induce their employers to grant their demands. It is 
the latter line of activities that leads to labor wars, for employers in 
this country have not yet accepted trade unionism as a permanent 
thing. The means by which the unions seek to extort from em- 
ployers the things they desire we must now study in some detail. 

145. MEANS OF SEC]JRING DEMANDS. MONOPOLY. The 
main means employed by unions to get from employers better terms 
are (1) the power of monopoly, (2) collective bargaining, (3) the 
closed shop, (4) strikes, and (5) limitation of output. 

By forming a union, laborers seek to create a monopoly. Under 
modern conditions the individual laborer bargains with employers 
upon unequal terms. Employers are more or less united or have a 
common understanding as to wages and hours. Where laborers are 
many and employers few, the individual laborer is practically com- 
pelled to accept the terms offered him or remain idle, and if there 
is the slightest tendency towards an oversupply of labor of any 
grade wages will be low, hours long, and conditions as to health and 
safety very undesirable, where the law does not sufficiently pro- 
vide for health and safety, and it usually does not. If, however, 
all laborers in any trade unite and agree upon terms which they 



218 ELEMENTS OF ECONOMICS 

will demand of employers the situation is entirely different. If 
the union is an open union, being open for all in the trade to enter, 
Bnd if the demands made upon employers are reasonable, the aims 
x)f trade unions are laudable; but if the union is a closed union or 
if demands upon employers are inconsistent with the just rewards of 
capital then the trade union is a thing which society should suppress. 
By a closed union is meant one that limits the number of those 
in the trade. This is the real spirit of monopoly which seeks not 
the uplift of the laboring class as a whole but selfishly seeks special 
privileges for the few who are allowed to enter the trade, regard- 
less of the welfare of their fellow workers in other trades. 

146. JOINT AGREEMENTS. When monopoly is secured, then 
the next step is to enter into joint agreements, or collective bargain- 
ing plans. Representatives of the laborers and employers meet in 
convention yearly or at longer intervals and draw up elaborate 
agreements covering all sorts of questions concerning which there 
has been or is liable to be disputes, including wages, hours and 
conditions of employment. The agreement also provides for the set- 
tling of local disputes about the application of the rules agreed 
upon, a common method being to appoint a joint committee com- 
posed of representatives of the laborers and representatives of the 
.employer. These are called conciliation boards, or shop councils. 

The advantages of this system are manifest. If all establish- 
ments had such a system of joint agreements, labor wars would 
come to an end. The chief possible objection to such a system would 
be the tendency to create monopolies in lines of business now com- 
petitive. All competition as to hours, wages or general conditions 
of labor being eliminated, competition would naturally be in the 
direction of lower prices or better goods or service. But regular 
meetings of employers in an industry would be a very material 
aid in reaching monopolistic agreements among producers. Joint 
agreements between employers and laborers are common in Europe 
but in this country they are exceptional, American employers being 



ELEMENTS OF ECONOMICS 219 

generally hostile to unions. This hostility is due partly to the 
American spirit of independence, each employer desiring to do just 
as he pleases without restrictions as to union rules. There are other 
causes of this hostility, not the least being the desire to maintain 
profits undiminished; and it seems that in some cases unions abuse 
their power. Unions often strike for higher wages when their 
wages are already four or five dollars a day, or two or three times 
as much as unskilled laborers receive. This is manifestly unfair 
to society and to non-union laborers, who are usually prevented by 
prevailing conditions from maintaining unions, the labor market being 
oversupplied with unskilled labor. An increase in the spirit of fair- 
ness on the part of both employers and laborers would materially 
improve the conditions in the labor world and lessen strife which 
is so destructive to all. 

147. THE CLOSED SHOP. The closed shop may mean a shop 
closed to union labor or to non-union labor, but generally it means 
a shop closed to non-union labor. The open shop is one in which both 
union and non-union men are employed. If the closed shop is con- 
nected with a closed union, nothing is to be said in its favor, as 
it creates a monopoly of the worst kind. 

Trade unionists claim that if joint agreements are to be entered 
into the closed shop is necessary, since laborers must be organized 
in order to send representatives to joint meetings and to joint con- 
ciliation boards. Also they urge that it is unfair to union men to 
make them bear all the burden of paying the expense of maintain- 
ing the union and let non-union men have the benefits of the union. 

Various objections are made to the closed shop. It is claimed 
that it is a means of coercing non-union men against their will, that 
it robs the American workingman of his natural right to work where 
he will and for such wages and under such conditions as he may 
choose to accept. Unionists contend, on the other hand, that such 
liberty is no liberty at all except that of being a slave, and that the 
unionist has a right to decide with whom he will work and under 



220 ELEMENTS OF ECONOMICS 

what conditions. 

Court decisions on "closed shop" contracts are conflicting, some 
holding: that such contracts are legal and not contrary to the spirit 
of American freedom, especially freedom of contract. On the other 
hand, some court decisions go so far as to deny an employer the 
right voluntarily to enter into such a contract because it violates his 
own freedom of making a different contract with non-union men. 
This seems the height of absurdity. This reasoning would destroy 
all contracts, since a contract restricts both contracting parties in 
their power to make contracts contrary to the terms agreed upon. 
All contracts limit our power of making other contracts. 

Not a little of the opposition to the closed shop is due to 
the unfair means used by union men in practically forcing men into 
the union. The non-union man is made to feel disagreeable in every 
conceivable way. He is made a social outcast, is called a scab, and 
all sorts of tricks are played upon him. If the non-union men were 
won over by persuasion and agreement, trade unionism would seem 
more desirable at least to the public. 

148. STRIKES. When unions fail to secure their demands from 
employers, the common weapon is the strike. It would seem that 
strikes are increasing in recent years, though no reliable figures 
are available. Every year there are hundreds of local labor wars 
and usually there are two or three on a vast scale involving large 
numbers of men and the loss in wages runs up into the millions 
of dollars. During the first half of the year 1913 there were 195 
strikes in New York State alone, and 124,573 employees were di- 
rectly concerned. During the same year occurred the strike of the 
workers in the silk industry at Paterson, New Jersey. About 25,000 
employees were involved and it is estimated that their loss in wages 
amounted to $5,000,000. In the same year a bitter labor war raged 
in West Virginia in the coal mining industry, the strike resulting 
in a victory for the miners, after the loss of over $2,000,000 and 
13 lives. In 1914 also occurred the great Calumet copper mine strike 



ELEMENTS OF ECONOMICS 221 

in Michigan, and, most notable of all, the Colorado coal mineTs' strike. 

Men have a legal right to strike. But strikes are usually at- 
tended with violence, lawlessness and often murder. Employers im- 
port strike breakers, "scabs" the strikers call them, and often employ 
armed guards to protect the strike breakers. These strike break- 
ers are often professional strike breakers, daring, lawless men, in- 
tensely hated by the strikers. The presence of such men and of 
armed guards, who are often armed ruffians, naturally leads to a 
conflict with the strikers, and real war follows. Often the state 
tnilitia are called in to put down the disorders and sometimes the 
disturbance gets beyond the control of the state militia and federal 
troops are called in, as in the Colorado strike. 

Moreover, the public is seriously injured in other ways by these 
labor wars. In case of a street car strike the entire transportation 
system of a city may be paralyzed for months, to the great incon- 
venience of the people. In a coal strike a coal famine inflicts great 
hardships and sufferings upon perhaps millions of people. With 
the present organization of industry, each group of laborers has 
moral obligations to fulfill, and all are in duty bound to have due 
regard to the interests of the other workers who are supplying them 
with their means of living. Hence, laborers should not enter into a 
strike upon slight provocation. Unfortunately they often plunge into 
these labor wars when they are receiving much better wages than 
the mass of the workers and when there is no serious grievance. 
But the public has rights in the matter. It is because the public 
has rights that there is a growing demand for compulsory arbitra- 
tion in labor disputes. 

149. LIMITATION OF THE OUTPUT. Another means used to 
some extent by trade unions to increase wages is to decrease the 
output per man. To what extent this practice prevails is not defi- 
nitely known, as no thorough investigation has been undertaken. Em- 
ployers assert that it is quite prevalent. Sometimes union rules limit 
the amount of work a member shall do in a day and sometimes a 



222 ELEMENTS OF ECONOMICS 

common understanding accomplishes the same purpose. In some 
cases the amount of work prescribed by the union or the maximum 
amount accomplished by a common understanding is not one-half 
an honest day's work. 

The reasons for this limitation of output are mainly two, and 
these are powerfully assisted by laziness which is characteristic of 
most people when there is no special incentive to long and sustained 
hard work. One reason is the effort to offset the tendency of em- 
ployers to speed up. In case piece wages are paid, employers often 
select their fastest workman, ascertain the amount of his work, and 
make the piece rates sUch that the pace-setter makes only a fair 
day's wage. This will automatically reduce the rates of the slower 
workmen below a decent living standard. Another reason for lim- 
iting the output is a false theory of wages. Workingmen believe 
that if each man does less work, demand for labor will increase and 
the rate of wages will rise. 

Is this limitation of output justifiable or beneficial to the labor- 
ing classes? In case it is done to prevent the unjust and inhuman 
practices of speeding up machinery beyond reason or of reducing 
wages below a decent standard by the selection of a pace-setter, a 
limitation of the output is commendable, provided it is not carried 
to the other extreme of reducing the day's work below a fair amount 
for the ordinary man. If only a few unions limit output it might 
be beneficial to them by creating a larger demand for that class of 
labor. But if all workmen should limit the output all would be in- 
jured, because high real wages cannot be paid unless there is a large 
product per man. If fewer things were produced all around, there 
would be less to distribute, and consequently prices would be higher 
and real wages lower. Trade unions make two mistakes, first that 
demand for labor would remain the same if output is limited and 
second that prices would also remain the same. Thus, when a few 
trade unions limit the output, they injure all other laborers who con- 
sume these products. In this matter we have another illustration 



ELEMENTS OF ECONOMICS 22S 

of the need of sound knowledge of economics among workingmen. 

150. COMPULSORY ARBITRATION. Out of the disorders an<J 
inconveniences to the public resulting from strikes has grown a 
demand for compulsory arbitration. There is a growing conviction 
that the public has rights as well as laborers and employers, and we 
are beginning to realize that production is a social process in which 
all producers are partners. There is a growing feeling, therefore, 
that laborers and employers have no moral right to plunge into an 
industrial war to the injury of the general public unless the situation 
is desperate, and that public authority has a right and is in duty 
bound to prevent such labor wars. 

In response to this conviction compulsory arbitration has been 
inaugurated in some countries, notably Australia. Seemingly it 
has worked well in foreign countries, the success of this new ven- 
ture by the government being partly due to the power of fixing a 
minimum wage. In Australia failure to accept the award of the 
board of arbitration leads to severe punishment by the state. 

In this country it would seem difficult to apply the theory of 
compulsory arbitration because individualism and ideas of personal 
liberty are firmly imbedded in our national and state constitutions- 
and permeate all our thinking. Any law that would take away the 
right of laborers to quit work, individually or collectively, or that 
would force them to work under conditions they did not like would 
quickly meet a judicial veto on the ground that it violated the state 
or national constitution. Nor would any attempt to amend our funda- 
mental laws lessening personal liberty in these respects be likely to- 
meet with approval. 

Because of these constitutional limitations compulsory arbitra- 
tion is impossible in the United States. Voluntary arbitration is 
being applied, however, with some success. The National Depart- 
ment of Labor is empowered to offer its services in case of labor* 
troubles and many labor disputes have been arbitrated. The= 
amended Erdman Act (1913) also provides for a Board of Mediation 



224 ELEMENTS OF ECONOMICS 

and Conciliation which may offer its services in preventing or end- 
ing strikes. By this act also a special board of arbitration may be 
selected, two members being selected by the laborers, two by the 
employers, and two by these four. The award has no legally bind- 
ing force, but thus far several strikes have been prevented by this 
plan of voluntary arbitration. Whether or not voluntary arbitra- 
tion will become an effective means for preventing industrial war- 
fare in the United States remains to be seen. 

151. PROFIT-SHARING. Profit-sharing holds out promises 
for the solution of the labor problem along different lines from those 
offered by trade unions. Profit-sharing hopes to increase wages 
and prevent industrial warfare by uniting laborers and employers 
in bonds of sympathy and good will. It is a highly altruistic plan 
which is designed to appeal to the better side of human nature. 
Trade unionism seeks ultimately to join laborers and employers to- 
gether through collective bargaining plans; but even in its ulti- 
mate form the spirit of contest is present, each side struggling to 
get the best of the bargain. 

The possible advantages of profit-sharing are that the laborers 
will be interested in the success of the business, will do a fair 
day's work, and will be more careful and painstaking, and, being 
thus partners in the undertaking, the spirit of strife will be elimin- 
ated. Unfortunately, most employers who have tried the plan are 
unwilling to give labor a very large share of the profits, and the 
Tegular wages still constitute the main source of the laborer's in- 
come. Hence, if regular wages are low, the temptation to strike to 
increase them still remains. It also seems true that most men 
are stimulated more by the fear of the loss of their position than by 
the reward of a slightly increased wage. Moreover, in times of in- 
dustrial reverses when profits fall and the share going to labor 
decreases or disappears altogether, laborers are dissatisfied. On 
the whole, there seems little prospect of the labor problem being 
solved by profit-sharing. Until human nature is considerably 



1 



ELEMENTS OF ECONOMICS 225 

changed, profit-sharing will remain a minor factor in the indsutrial 
world. A few high minded employers, filled with enthusiasm for 
the scheme, gather around them workmen of superior intelligence 
and equally enthusiastic and make a success of it. But they are 
very few. 

152. COOPERATION. Another method of solving the labor 
problem is through productive cooperation among laborers by which 
the employer is eliminated. The cooperative movement, started in 
England a century ago, held out high hopes to the laboring man. By 
becoming their own employers laborers expected to get regular wages 
plus the profits of the employers. Many attempts were made to 
establish cooperative work shops, but they universally failed, chiefly 
because of the difficulty of securing sufficient capital and able man- 
agement and the feeling among the workers that they were owners 
of the establishment and each man was his own boss, which feeling 
prevented effective organization and direction of the workers. 
Finally a new plan was devised known as the Rochdale plan, by 
which laborers cooperated in buying the goods for their final con- 
sumption, that is, they set up retail cooperative stores. In 1844 a 
little store was opened on one of the back streets of Rochdale, Eng- 
land, on the cooperative plan. Goods were sold at regular market 
prices but member customers received dividends from profits, divi- 
dends being in proportion to amount of goods purchased. The plan 
succeeded and other cooperative retail stores sprang up all over 
England and Scotland. Then retail stores combined and established 
wholesale stores, and the profits of the wholesaler were saved by 
the members of the retail stores. The cooperative idea was applied 
still further by the wholesale stores combining to establish fac- 
tories to save the profits of the manufacturer. As a result of this 
movement the majority of the working men in England and Scotland 
buy the majority of their goods at their own cooperative stores and 
thus reduce the cost of living about twenty or thirty per cent. In 
order to do this, it was found necessary to establish the principle 



226 ELEMENTS OF ECONOMICS 

that no employee can have any voice in the establishment in which 
he works, though he may have a voice in the management of other 
establishments in the great cooperative system. 

This cooperative plan has spread to other countries of western 
Europe and is slowly beginning in this country notably, in the North- 
west among the Scandinavian elements who brought the idea from 
their native lands. Other forms of cooperation are also spreading, 
but these are among those already producers, not laboring men. lii 
fact most of the co-operative enterprises in the United States are 
not connected with the laboring classes and are not solutions to the 
labor problem. Farmers have established cooperative creameries and 
elevators, fruit growers have established cooperative marketing, and 
other enterprises are springing up. Unfortunately these undertak- 
ings are intended to enhance the profits of farmers and fruit grow- 
ers not only by introducing better marketing methods but by arti- 
ficially raising prices. Instead of being a solution of the labor prob- 
lem the American cooperative movement is partly detrimental to 
the laboring classes. 

Cooperation among laborers seems to have its limitations, among 
them being lack of capital and skilled management. The great coop- 
erative stores, mills, and factories of Europe are run with much ability, 
but they confine themselves to the great staple products which have 
a wide demand and where the freaks of fashion play little part. At 
most, cooperation seems able only to make wages go a little further, 
and if wages are very low cooperation does not solve the labor problem. 

153. LABOR LEGISLATION. One of the means employed by 
trade unions and their friends to secure better conditions of labor 
is to influence legislation, and the trade union world seeks not only 
to elect men favorable to labor but to influence legislation by the 
same means capitalists employ, lobbying. Thus far state laws have 
attempted to compel employers to provide for the health and safety 
of their employers, and in some trades where unions are strong 
these laws are fairly satisfactory. But in some cases, as in coal 



ELEMENTS OF ECONOMICS 227 

mines, much is yet needed in this direction, the loss in life being 
much greater than it need be. In industries in which there is no 
strong union, conditions are far from ideal, and some of the gar- 
ment making establishments and similar industries are regular fire 
traps. 

One topic receiving much attention of late is the reform of em- 
ployer's liability laws. The old liability laws were based upon the 
theory that employers were not liable to pay damages for the in- 
jury or death of employees unless it could be proved that the em- 
ployers were directly to blame; and the injured person or his family 
must bring suit against the employer. This imposes a hardship 
on the laborers, for lawyers' fees are heavy and in many indus- 
tries where jurors are mostly employees of the defendant or of his 
friends, the injured party is apt to lose his case because jurors 
are afraid to bring in a verdict against their employers. As a con- 
sequence, the usual decision is, unavoidable accident. But there 
is a growing feeling that this situation is unjust and that liability 
laws should automatically give compensation for injuries without 
the laborer having to bring suit, and that if employers wish to con- 
test the payment of damages on the ground that the accident was 
the result of willful negligence of the employee, they must do so 
at their own cost. This growing feeling that liability laws should 
he thus reformed springs from the belief that the dangers of mod- 
ern industry should be a general charge upon the icost of produc- 
tion to be born by consumers and not by the families of the injured 
or killed. A few states are amending their employers' liability laws 
in this direction. 

Thus far little has been done by legislation to limit the hours 
of labor or to raise wages. This is partly due to the theory of free- 
dom of contract, previously referred to. But the freedom of con- 
tract of the individual laborer is a fiction because of several pecul- 
iarities of labor. First, the laborer and his product are inseparable 
and hence the laborer must often accept very undesirable condi- 



228 ELEMENTS OF ECONOMICS 

tions or not work at all. In the second place, labor is a perishable 
commodity, so to speak. It cannot be held in reserve and sold later 
at a better price, for a day's labor lost is lost forever. In other 
words, the laborer must constantly work or his income ceases. In 
the third place, the supply of labor is not readily adjusted to the 
demand, as in the case of an ordinary commodity; hence an over- 
supply may force wages down. But in spite of low wages, long 
hours or unsatisfactory conditions the laborer must work or beg or 
starve, and many nearly starve when they do work. Hence the 
theory of the freedom of contract is a fiction. 

This old fiction, however, together with our individualism, has 
thus far prevented our lawmaking bodies from aiding labor by 
limiting hours or raising wages. In a few cases laws have been 
passed and sustained by the courts limiting hours of labor in cer- 
tain industries where long hours endanger the health of the laborer 
or the safety of the public. Limitation of hours of railway train 
crews is an illustration of the latter kind of laws. Our courts for 
many years were more conservative than legislatures and many 
laws designed to benefit labor and protect the public were declared 
unconstitutional because they violated the freedom of contract. Of 
late years, however, under severe criticism of the press our courts 
are taking more progressive views and are sustaining many kinds 
of laws that were formerly declared unconstitutional. 



ELEMENTS OF ECONOMICS 229 

CHAPTER XVIII. 

Socialism. 

154. SOCIALISM DEFINED. Socialism represents the radical 
element of discontent and the remedy offered for the ills of society 
is the most radical known. What socialism proposes is (1) public 
ownership and management of all productive property, (2) public 
management of the distribution of the social income, and (3) pri- 
vate ownership of incomes and consumers' goods purchased with 
wages received. In other words, there is to be no private business. 
Private property in many things will exist, but no one can engage in 
business for commercial gain. Some inequality thus would be allowed, 
for accumulated durable property such as houses might be handed 
down from one generation to another. But all would be servants of 
the state and all would have to work for a living, until the old age 
limit would be reached, for no matter how much property one might 
inherit, it could not be used to gain a profit, though it might be 
sold and thus squandered. 

155. ORIGIN AND GROWTH. The Industrial Revolution pro- 
duced modern socialism. Ideas of socialism are as old as Greek 
civilization, but until the nineteenth century these ideas were held 
by a few only. But the socialism of the present is a mighty force. 
The same conditions that produced trade unionism also produced 
socialism, the more conservative among the discontented placing their 
hopes in the strength of union among laborers to secure what they 
desired; the more radical among the discontented turned to socialism 
and proposed to abolish the distinction between employer and em- 
ployed. 

Rapid growth in political power dates from about 1830, in Eu- 
ropean countries, the mass of the people having little power before 
that time. In some countries the socialists are the strongest party 
in the legislatures, but in none have they yet secured a majority. 
Their numbers are rapidly increasing, however, their voting strength 



230 ELEMENTS OF ECONOMICS 

m the 27 leading nations rising from 10 millions in 1913 to 11 millions 
in 1914. In the United States the miovement is also growing, the 
socialist strength being represented by a million votes. Among our 
working classes there is a strong leaning towards socialist doc- 
trines, and many are really socialists who do not call themselves 
such. The most active branch of the socialists in this country are 
the Industrial Workers of the World. Their leaders are constantly 
watching for a chance to stir up strife between laborers and em- 
ployers, and some of the most important strikes of the last two' 
or three years have been conducted by the I. W. W. Their motta 
seems to be, strike whenever you can and as long as you can, and 
thus wear out the employers and make them glad to turn over their 
capital to society, thus inaugurating socialism. This brief view of 
the growth of modern socialism will show us the extent of the 
movement and the grave problem presented to us. That problem is,. 
Shall we tear down our industrial structure and build it all over 
again? We must answer that question one way or the other, for 
the movement is upon us. 

156. CHARGES AGAINST CAPITALISM. There are three ser- 
ious charges socialists bring against capitalistic society, (1) the 
laboring men are robbed of a large part of their product, (2) this 
leads to a perpetual struggle between capital and labor, and (3) 
capitalistic production is planless and wasteful. These charges are 
bound up with the socialists' theory of modern economics. They 
hold that labor, being the only active agent, creates the whole 
product. Capital helps to be sure, but, they say, since labor pro- 
duces the capital, the whole product is due to labor. The present 
organization of industry robs the laborer of most of his product,, 
and the two chief robbers are the rent receiver and the interest 
receiver, because they are purely economic parasites, since neither 
contribute anything to society. But since they own two of the in- 
struments of production they can levy tribute upon the remainder 
of society. The employer or profits receiver also robs labor by the 



ELEMENTS OF ECONOMICS 23L 

"iron law" of wages. This iron law, is, briefly stated, the law of 
Maithus. The increase in population constantly keeps wages down 
to the minimum of subsistence, no matter how much power man gains 
over nature. Hence the laborer is always on the verge of starva- 
tion while the rich are growing richer. 

But laborers are becoming more intelligent through universal 
education and are beginning to recognize their rights and are strug- 
gling to secure a larger share of the product. This struggle is bound 
to last as long as capitalism lasts, because the three robbers wish: 
to maintain their aristocratic positions and will always refuse to 
give the laborer even a fair share of the product, and on the other 
side, the growing intelligence of labor will make it more powerful 
and more unyielding in its demands. Thus the struggle will con- 
tinue until capitalism is abolished. 

In the third place, say the socialists, the present system is plan- 
less and wasteful. The producers merely guess at the amount needed- 
by society, each producer struggling to sell all he can. No one 
plans the production so as to meet all the needs of all the people. In 
marketing there is again much waste in advertising, in cross-ship- 
ments, in retailing. 

157. CRITICISMS. There is no doubt of the fact that there 
is much truth in the socialists' charges against modern industry; but 
parts of their theory are false and the remedy they propose may 
be like jumping out of the frying pan into the fire. In the first 
place, it may be true in a sense that labor produces the whole 
product, since it produces the capital and gets the land in shape for 
production. But that is a different proposition from what the 
socialists mean, which is, that the wage earning classes produce the 
whole product. Saving is an essential part of the process of cre- 
ating capital; but the wage earners have not been the ones who have 
saved, else they would have been the capitalists and landlords. Also, 
the work of management is as truly productive as manual labor, and 
wage earners cannot claim that the active capitalists, the employer^. 



232 ELEMENTS OF ECONOMICS 

does not produce a part of the product. It is not true, therefore, that 
wage earners create the whole product. 

In the second place, there is no iron law of wages. The social- 
ists have misinterpreted the law of Malthus. By the right interpre- 
tation of that law man is master of his own destiny. If laborers 
will but use good judgment there will be no oversupply of labor; 
and the middle and upper ranks of labor have enjoyed a considerable 
share of the improvements in modern industry. With proper educa- 
tion, general and industrial, the oversupply of unskilled labor will 
be checked and the present degraded condition of unskilled labor will 
be improved. 

In the third place, labor wars will not necessarily continue. In 
some countries where the state has stepped in to regulate these wars 
they are becoming a thing of the past. If society can take over the 
whole industrial process, production and distribution and all, it surely 
can superintend a part of the process when things are not running 
smoothly. 

In the fourth place, there is plenty of industrial waste. But 
in this struggle to satisfy the wants of society lies the progress of 
the race along industrial lines. Much of the waste may be elimin- 
ated by wise social cooperation. By good banking systems panics 
can be minimized; by proper regulation of monopoly, including the 
regulation of prices, much harm can be prevented, still leaving room 
for private initiative. More social control may prove effective, and 
render unnecessary the radical remedy of socialism. Even now the 
marketing problem is being attacked and on every hand the spirit of 
cooperation and helpfulness is beginning to get possession of the 
governments of the world, and there is no reason to believe that 
society cannot cooperate to correct social ills as well under capital- 
ism as under socialism, without encountering the dangers of gov- 
ernment ownership and management of every industry and without 
losing the advantages of private initiative and enterprise. 

158. SOCIALIST PRODUCTION. It would appear that social- 



ELEMENTS OF ECONOMICS 233 

ists propose to retain the general organization of productive enter- 
prises now existing, but they will be directed by committees or com- 
missions of the government. The hiring of labor, deciding what to 
produce, how much to produce and prices to charge must all be de- 
termined. Now the question arises, Will everything run smoothly, 
or will there be more trouble for society under socialism than under 
social control of private industry? 

The first suggestion that arises is. Who will decide what each 
man shall do in this industrial Eden? Will each man decide for him- 
self or will the government decide for each man? If each man 
decides for himself the government will be confronted with the prob- 
lem of finding work for men when it does not need them, for there 
is no assurance that the number choosing a certain line of work 
will be in proportion to the number needed. In that case the gov- 
ernment would be forced to take all who offer themselves, for under 
socialism the government would be absolutely compelled to employ 
all who want work, and that includes all but the young or the aged, 
for there is to be no private business. And suppose men "soldier 
on the job?" Who is to compel them to work? On the other hand, 
if the government decides what each man shall do, the thing reduces 
itself to slavery. 

It is necessary to point out the marked difference between gov- 
ernment ownership of a few industries and government ownership of 
all industries. In the former case the government is under no obli- 
gation to employ all who offer themselves, but it can select whom 
it wishes, at wages measured by prevailing rates in private business, 
and if employees prove really unfit, they can be dismissed. 

Before we adopt socialism it will be well to think seriously of 
these matters and decide whether or not the remedy offered for 
social diseases may not make those diseases worse or else bring 
other and more serious disasters upon us. Until it can be shown that 
the majority of mortals are unselfish, strictly honest, and anxious 
to work for the general welfare, socialism vdll not improve the 



234 ELEMENTS OF ECONOMICS 

material welfare of the race; and when the time comes that most 
men are ideal men there will be no social ills for socialism to remedy. 

159. SOCIALIST DISTRIBUTION. Socialists are not agreed on 
their plan of distribution, that is, on their wage scale, but several 
plans have been suggested. One is equal pay for all. This plan 
would manifestly be disastrous, for it would offer no reward for su- 
perior merit or ability, and hence the spur to advancement of society 
would be lacking. 

Another plan is pay in proportion to needs. But what is the 
test of needs? If it is the size of the family, the increase in popu- 
lation would ere long impoverish the whole race. 

Others advocate pay according to merit. Theoretically this plan 
looks workable. But what is to be the test of merit? According 
to present day standards among day laborers, mental labor is ranked 
little above manual labor. Unless mental achievements are rated 
above the physical, the progress of the race is doomed, for if mental 
effort is not rewarded above the physical, and considerably above it, 
few will struggle through the years of study necessary to prepare 
for high intellectual work. 

Thus when we look closely at the plans of distribution offered 
by the socialists we see that each has its serious dangers. And so 
many possible dangers are presented by socialism that it would seem 
unwise to adopt it until we have more thoroughly tested less radical 
means of curing the evils in industrial society. 



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